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MODERN    BUSINESS 


Registered  Trade  Mark 
United  States  y  Great  Britain 
Marca  Registrada  •  M.  de  F. 

A  SERIES  OF  TEXTS 

PREPARED    AS    PART    OF    THE 

MODERN  BUSINESS  COURSE  AND  SERVICE 

OF  THE 

ALEXANDER  HAMILTON  INSTITUTE 


Modern   Business 


'Volumes 


1.  Business  and  the  Man 

2.  Economics  —  The    Science    of 

Business 
Business  Organization 
Plant  Management 
Marketing  and  Merchandising 
Salesmanship  and  Sales 

Management 

7.  Advertising  Principles 

8.  Office  Administration 

9.  Accounting  Principles 
to.  Credit  and  Collections 
ti.  Business  Correspondence 

12.  Cost  Finding 

13.  Advertising  Campaigns 


14.  Corporation  Finance 

15.  Transportation 

16.  Foreign  Trade  and  Shipping 

17.  Banking 

18.  International  Exchange 

19.  Insurance 

20.  The  Stock  and  Produce 

Exchanges 

21.  Accounting  Practice  and 

Auditing 

22.  Financial  and  Business 

Statements 

23.  Investments 

24.  Business  and  the 

Government 


editor-in-chief 

JOSEPH  FRENCH  JOHNSON 


managing  editor 
ROLAND  P.  FALKNER 


associate  editors 

T.  Coulston  Bolton,  Ralph  D.  Fleming,  Leo  C^eendlinger 

Charles  W.  Hurd,  Theodore  H.  Rand-McNally 


writers  and  consultants 
\_  See  list  on  page  v  of  Volume  I  3 


COST  FINDING 


BY 

DEXTER  S.  KIMBALL 

Dean,  Engineering  College,  Cornell  University 


MODERN  BUSINESS 
VOLUME   12 


ALEXANDER  HAMILTON  INSTITUTE 
NEW  YORK 

40MS 


COPYRIGHT'igi? 
BY    ALEXANDER   HAMILTON    INSTITUTE 

COPYRIGHT     IN     GREAT     BRITAIN'igiJ 
BY    ALEXANDER    HAMILTON    INSTITUTE 

All  rights  reserved,  including  translation  into  Scandinarrian. 
Made  in  U.  S.  A. 

REVISED   I92I 


i  *  :-\i" 


Bos.  Admizu 
Lihrary 


eBK5 


PREFACE 

The  aim  of  this  Text  is  to  discuss  in  a  direct  and 
simple  manner  the  fundamental  principles  that  under- 
lie all  cost-finding  systems.  Abstruse  and  abstract 
arguments  have  been  avoided  and  an  effort  has  been 
made  to  make  the  work  of  practical  use.  Commercial 
data,  diagrams  and  typical  documents  used  in  cost 
finding  have  been  inserted  only  where  needed  to  illus- 
trate the  discussion,  and  no  attempt  has  been  made  to 
present  complete  cost  systems,  as  is  often  done  in 
treatises  of  this  kind.  Industrial  conditions  vary 
widely,  and  it  is  believed  that  if  the  fundamental 
principles  of  cost  finding  are  thoroly  understood  and 
the  peculiar  conditions  of  the  particular  problem  in 
hand  are  carefully  studied,  the  making  of  blanks  and 
forms  should  be  a  minor  difficulty. 

Care  has  been  taken,  also,  to  point  out  as  far  as 
possible  the  limitations  of  the  theories  and  methods 
that  have  been  discussed.  Cost  finding,  at  best,  is  a 
complex  matter  and  is  far  from  being  an  accurate 
science.  The  successful  choice  of  a  cost-finding  sys- 
tem that  will  be  suitable  for  a  given  set  of  conditions 
depends  to  a  large  degree  on  a  knowledge  of  the  limi- 
tations of  the  methods  to  be  employed.    In  all  prob- 


vi  PREFACE 

ability  more  systems  fail  because  of  a  lack  of  knowl- 
edge of  limitations  on  the  part  of  those  instituting  or 
operating  such  systems,  than  for  any  other  single 
reason. 

In  the  preparation  of  this  volume  the  works  of  other 
writers  in  this  field  have  been  consulted,  and  so  far 
as  possible  such  aid  has  been  acknowledged  in  the  Text. 
Grateful  acknowledgment  is  made,  however,  for  such 
help  as  has  not  been  specifically  mentioned.  Special 
acknowledgment  is  made  to  Mr.  A.  Hamilton  Church 
and  Mr.  Sterling  Bunnell  from  whose  writings  much 
helpful  assistance  has  been  drawn. 

Dean  Kimball  has  written  the  present  volume  as 
a  companion  to  the  Modem  Business  Text  on  "Plant 
Management."  The  distribution  of  the  material  be- 
tween the  two  volumes  was  the  subject  of  frequent 
consultation  with  the  officers  of  the  Institute,  and 
much  of  the  merit  of  the  two  volumes  is  due  to 
Dean  Kimball's  keen-minded  and  cordial  coopera- 
tion in  this  matter. 

The  Editors. 


TABLE  OF  CONTENTS 


CHAPTER  I 

THE  IMPORTANXE  OF  COST  FINDING 

SECTIOIf  PAGS 

1.  Few  Men  Understand  Cost  Finding 1 

2.  Purpose  of  Cost  Records 2 

3.  Trained  Men  Required 3 

4.  Each  Business  Requires  Individual  Study    ...  5 

5.  Importance  to  Whole  Industries 5 

6.  Inadequacy  of  Crude  Methods 7 


CHAPTER  II 
PROBLEMS  OF  COST  FINDING 

1.  Bookkeeping,  Accounting  and  Cost  Finding 

2.  Cost  Accounts  a  Branch  of  General  Accounts 

3.  Divisions  of  Productive  Industry 

4.  When  Cost  Records  Become  Necessary  . 

5.  Application  to  Manufacturing  Plants   . 

6.  Departments  Not  Alwa3's  Fully  Developed 

7.  Departmenti2ation 


10 
11 
12 
14 
16 
19 
20 


CHAPTER  III 

PROBLEMS  OF  COST  FINDING  (Continued) 

1.  Basic  Cost  Problem  Similar  in  All  Industries      .       .  24 

2.  Other  Relations  to  General  Accounting        ...  24 

3.  Functions  of  Cost  Finding  Summarized  ....  28 

4.  Complexity  of  Costs 28 


viii  COST  FINDING 

6B0TI0N  PASH 

5.  Direct  and  Indirect  Material 29 

6.  Direct  and  Indirect  Labor 30 

7.  Burden  or  Expense 30 

8.  General  Classification  of  Expense 31 

9.  Elements  of  Total  Cost 32 

10.  Methods  of  Adding  Profit 34. 

11.  Applicability  of  Cost-finding  Principles       .      .      ..,  35 


CHAPTER  IV 

IDENTIFICATION  OF  COSTS 

1.  Classification  of  Accounts .  37 

2.  Formation  of  Subsidiary  Ledgers 40 

3.  Separate  Cost  Records 41 

4.  Continuous-process  Industries     .      .       .  •    .      .      .42 

5.  Intermittent-process  Industries 44 

6.  Combined  Intermittent  and  Continuous  Factories  .  44 

7.  Blanks  and  Forms  for  Cost  Finding       ....  46 

8.  Two  Classes  of  Blank  Forms 48 

9.  Necessity  of  Identifying  Work 49 

10.  Mnemonic  Symbols 61 

11.  Drawing  Numbers 52 

12.  Drawing  Lists 64 

13.  Mnemonic  and  Number  Systems  Compared  .      .      .  56 

CHAPTER  V 
ISSUING  AND  EVALUATING  MATERIAL 

1.  Issuing  Materials  in  General 69 

2.  Requisitions  by  Foremen 60 

3.  Planning  Production  in  Advance 61 

4.  Specifying  the  Material 62 

5.  Production  Orders       .      .      . ;     .      .      .      .     , .      .  1 64 


CONTENTS  ix 

'  SECTION  PAQK 

6.  Instructions  to  Storekeeper 66 

7.  Emergency  Requisitions 67 

8.  Requisitioning  Indirect  Material 68 

9.  Valuation  of  Issued  Material 69 

10.  Value  of  Material  in  Process  of  Fabrication     .  71 

11.  Value  of  Finished  Parts 72 

12.  Value  of  Finished  Product  and  Stock     ....  73 

13.  Material  Wastes 74< 


CHAPTER  VI 

EVALUATION  OF  LABOR  COSTS 

1.  Recording  Time  by  Checkboard 78 

5.  Time-recorders 79 

3.  Traveling  Timekeeper 81 

4.  Job  Tickets 82 

6.  Other  Time-recording  Devices ^6 

6.  Summarizing  Time  and  Labor  Returns  ....  88 

7.  Other  Items  of  Labor  Costs 90 


CHAPTER  VII 
EXPENSE  OR  BURDEN 

1.  Character  of  Expense 93 

2.  Expense  Fluctuation  With  Volume  of  Business       .  95 

3.  Variations  of  Expense  Due  to  Time       ....  96 

4.  Expense   Variation  With   Character   and   Size   of 

Work 98 

5.  Clerical  and  Selling  Expenses 99 

6.  Two  Purposes  of  Expense  Distribution       ^      •      .  101 

7.  Classifying  Expense  Factors 101 

8.  Theoretical  Consideration  of  Interest  and  Rent     .  104 

9.  Practical  Consideration  of  Interest  and  Rent    .       ,  106 
10.  Interest  on  Owned  Capital 107 


X  COST  FINDING 

CHAPTER  VIII 
EXPENSE  OR  BURDEN  (Continuedy 

SECTION  PAGB 

1.  Taxes  and  Insurance       .    ' 110 

2.  Defective  Material  and  Spoiled  Work  .      .      .      .110 

3.  Lost  Time 112 

4.  Engineering  and  Development 113 

5.  Patterns,  Drawings  and  Small  Tools      .       .       .       .116 

6.  Special  Apparatus 117 

7.  Improvements  and  Repairs 118" 

8.  Inclusion  of  Burden  in  Cost  of  Repairs  .       .      .  120 

9.  Plant  Ledger 121 

10.  Sundry  Expenses 123 

11.  Character  of  General  Expense   .       .       .      .      .       .124 

12.  Cost  of  Welfare  Work .124 


CHAPTER  IX 
DEPRECIATION 

1.  General  Theory 127 

2.  Capital  Account  and  Revenue  Account  ....  128 

3.  Forms  of  Depreciation,  Wear  and  Tear     .      .       .  1-29 

4.  Physical  Decay,  Neglect        .      .      .      ...      .      .130 

5.  Inadequacy  and  Obsolescence 131 

6.  Relation  Between  Depreciation  and  Repairs     .       .  132 

7.  Relation  Between  Depreciation  and  Capital     .       .  133 

8.  Original,  Present  and  Scrap  Values      ....  "(SS 

9.  Determination  of  Depreciation 137 

10.  General  Method  of  Depreciation 138 

11.  Percentage  on  Original  Cost 140 

12.  Percentage  on  Diminishing  Value 141 

13.  Sinking  Fund 141 

14.  Typical  Rates  of  Depreciation 144 

15.  Depreciation  a  Manufacturing  Expense     .      .      .  146 


CONTENTS  xi 

CHAPTER  X 
DISTRIBUTION  OF  FACTORY  EXPENSE 

BBCnON  PACT 

1.  General 148 

2.  Distribution  by  Percentage  on  Material  Cost    .      .  150 
S.  Advantages  and  Defects 151 

4.  Distribution  by  Percentage  on  Labor  Cost  .       .       .  153 

5.  Advantages  and  Defects 153 

6.  Distribution  by  Percentage  on  Prime  Cost  .      .      .  156 

7.  Advantages  and  Defects 157 

8.  Distribution  by  Percentage  on  Man-hours  .       .       .  158 

9.  Advantages  and  Defects 159 

10.  Inadequacy  of  Foregoing  Methods 161 

11.  Relation  Between  Machine  Processes  and  Expense  163 

12.  Old  Machine  Rate 164 

13.  Modern  Machine  Rate 165 

14.  Advantages  and  Defects 167 

15.  Supplementary  Rate 170 

CHAPTER  XI 

PRODUCTION  CENTERS  AND  THE  SUPPLEMENTARY 
RATE 

1.  General  Principles 173 

2.  Production  Centers  Illustrated 174 

3.  Application  to  Actual  Conditions     .      .      .      .      .  175 

4.  Production  Factors 176 

5.  Land-building  Factor 178 

6.  Power  Factor 179 

7.  Lighting  Factor 180 

8.  Heating  Factor 181 

9.  Organization  Factor 181 

10.  Management  and  Supervision  Factor     ....  182 

11.  Stores  and  Transportation  Factor 183 

12.  Individual  Factors 184 


xii  COST  FINDING 

SEOTIOK  PACa 

13.  Controlling  Accounts 185 

14.  Assembling  of  Production  Factors 185 

15.  Inherent  Difficulties  and  Errors  in  Applying  Mod- 

ern Machine  Rates 192 


CHAPTER  XII 

EFFECT  OF  VOLUME  OF  WORK  ON  EXPENSE 
DISTRIBUTION 

1.  Variation  of  Expense  With  Volume  of  Work  .      .196 

2.  Illogical  Increase  in  Expense 197 

3.  Errors  in  Costs  Under  Averaging  Methods        .       .  198 

4.  Errors  in  Costs  Under  the  Supplementary  Rate     .  199 

5.  Responsibility  for  Costs 200 

6.  Mr.   Gantt's   Solution 200 

7.  Fixed  and  Variable  Expense 202 

8.  Mr.  Ficker's  Solution 203 

9.  Disposition  of  Undistributed  Fixed  Expense     .      .  204 
10.  The  Problem  of  the  Manager 206 


CHAPTER  XIII 

OTHER  FEATURES  OF  EXPENSE  DISTRIBUTION 

1.  Basis  of  Expense  Distribution 208 

2.  Application  to  Average  Methods 209 

3.  Application  and  Limitations 210 

4.  Verification  of  Expense  Distribution     ....  210 
6.  Continuous-process  Costs 211 

6.  Detail-process  Costs .      .212 

7.  More  Refined  Process  Costs 213 

8.  Other  Difficulties  of  Process-accounting       .      .      .  216 


CONTENTS  xiii 

CHAPTER  XIV 

DISTRIBUTION  OF  ADMINISTRATIVE  EXPENSE  — 
RESUME 

SECTION  PAS! 

1.  Distribution  of  Administrative  Expense       .      .      .   217 

2.  Selling  Expense 218 

5.  Departmentization 219 

4.  Departmentization  According  to  Finished  Product  221 

6.  Departmentization  According  to  Processes      .      .   222 
6.  Resume  of  Methods  of  Distributing  Expense     .      .   224 


CHAPTER  XV 
ASSEMBLING  AND  RECORDING  COSTS 

1.  Uses  of  Costs .  229 

2.  Cost  Data  for  Predicting  Performance  ....  230 

8.  Value  of  Expenditure  Reports 231 

4.  Sources  of  Cost  Data 232 

6.  Cost  Ledgers 283 

6.  Labor  and  Material  Cards 236 

7.  Labor-cost  Sheet 237 

8.  Material-cost  Sheet   .      .      .      . 239 

Cost-summary  Sheet 240 

Grand  Cost  Summary 240 

Comparative  Records 242 

Costs  by  Classes 243 

Detail  of  Costs 243 

Indexing  Cost  Summaries 245 

Relation  Between  General  Accounts  and  Cost  Ac- 
counts      246 

Cost  Accounts   Should  Agree   With   General   Ac- 
counts        248 


xiv  COST  FINDING 

CHAPTER  XVI 
ANALYSIS  AND  REDUCTION  OF  COSTS 

SECTION  PAGB 

1.  Use  of  Cost  Data 252 

2.  Organizing  for  Cost  Reduction 253 

3.  Relation  to  New  Ideas  of  Cost  Control  ....  253 

4.  Cost  Analysis 254 

5.  Special  Cost  Reports 255 

6.  Reduction  of  Material  Cost 257 

7.  Reduction  of  Labor  Costs 258 

8.  Relation  Between  Quantity  and  Equipment       .      .  259 

9.  Current  Ideas  of  Expense 260 

10.  True  Nature  of  Expense 261 

11.  The  Practical  Aspect  of  Expense 262 

12.  Analysis  of  the  Sources  of  Expense 262 

13.  Investigation  of  the  Usefulness  of  Expense       .      .  263 

14.  Limiting  Expense 265 


CHAPTER  XVII 

PREDETERMINATION  OF  COSTS— MATERIALS 
AND  LABOR 

1.  General 267 

2.  Difficulties  in  Predicting  Performance   ....  268 

3.  Estimating  Costs  of  Production 269 

4.  Distinction  Between  Actual  Costs  and  Estimated 

Costs 270 

5.  Predetermination  of  Material  Costs        ....  272 

6.  Control  of  Labor  Costs,  Day  Rate 272 

7.  Control  of  Labor  Costs,  Piece  Rate       ....  273 

8.  Labor-cost  Control  Under  Advanced  Wage  Systems  274 

9.  Time-Study 275 

10.  Motion-study .  277 

11.  Industrial  Data 278 


CONTENTS  XV 

12.  Standard  Performances 279 

13.  Limitations  and  Difficulties 279 

14!.  Connection  With  Advanced  Wage  Systems      .      .  281 

CHAPTER  XVIII 
PREDETERMINATION  OF  COSTS— EXPENSE 

1.  Preparation  Costs 283 

2.  Application  to  Special  Tools 285 

3.  Graphic  Cost  Data 287 

4.  Predicting  Expense 287 

6.  Conclusions 289 

CHAPTER  XIX 
APPLICATION  OF  COST  FINDING  METHODS 

1.  Principles  of  Cost  Finding  UniA'ersally  Applicable  292 

2.  Classification  of  Industry 292 

3.  Foundry  Costs 294 

4.  Foundry  Stores  S^'stem 294 

6.  Elements  of  Foundry  Costs 295 

6.  Cost  of  Metal 295 

7.  Distribution  of  Departmental  Expense  ....  296 

8.  General   Foundry  Expense 297 

9.  Intermittent  Process  Industries 298 

10.  Cost  of  Candy  Manufacture 299 

11.  Fluctuations  in  Base  Prices 301 

12.  Other  Industries   .       .      ^ 301 

13.  Commercial   Costs 302 

14.  Departmcntization  of  Retail  Stores        ....  303 

15.  Departmental  Costs 305 


xn— 2 


COST  FINDING 

CHAPTER  I 

THE  IMPORTANCE  OF  COST  FINDING 

1.  Few  men  understand  cost  finding. — No  part  of 
modern  industrial  organization  is  of  greater  impor- 
tance than  that  of  cost  accounting.  At  the  same  time 
there  is  perhaps  no  part  regarding  which  so  little  is 
generally  known.  In  the  great  majority  of  indus- 
trial establishments  the  art  of  cost  finding  is  still  in  a 
crude  and  undeveloped  stage,  so  far  at  least  as  in- 
dividual detail  costs  are  concerned.  This  is  particu- 
larly true  of  the  small  shop,  or  the  shop  which  has 
grown  up  around  a  pushing  and  skilled  mechanic, 
whose  knowledge  of  the  practical  side  of  his  art  is 
great,  but  who  neither  knows  nor  appreciates  the 
need  of  scanning  his  detail  costs  more  closely  as  his 
business  becomes  more  and  more  complex.  Accord- 
ing to  Bradstreet's,  four-fifths  of  the  industrial  fail- 
ures in  this  country  are  the  result  of  faults,  or  incom- 
petence of  one  kind  or  another,  on  the  part  of  those 
who  fail,  and  ignorance  of  the  true  cost  of  production 
is,  without  doubt,  one  of  the  most  common  of  the 
shortcomings. 


2  COST  FINDING 

2.  Purpose  of  cost  records. — Cost  finding  is  a  com- 
plex matter,  at  best,  and  as  industries  grow  to  great 
proportions  this  complexity  is  increased  in  like  ratio. 
The  methods  and  approximation  which  may  be  ample 
for  a  small  business  which  is  wholly  under  the  eye  of 
the  superintendent,  cannot  be  relied  upon  when  the 
plant  becomes  so  large  that  personal  observation  is 
insufficient;  system  of  some  sort  must  be  resorted  to. 
Furthermore,  the  demands  of  modern  industry  re- 
quire vastly  more  of  a  cost  system  than  was  deemed 
necessary  a  short  time  ago.  In  many  shops,  today, 
the  cost  system  is  considered  satisfactory  if  it  simply 
shows  the  cost  of  producing  the  several  items  manu- 
factured. But  the  modern  conception  of  a  cost-find- 
ing system  is  far  broader.  Such  a  system  must  not 
only  show  costs  as  such,  but  must  show  them  in  such  a 
form  that  deductions  may  be  drawn  as  to  the  reasons 
for  them  and  the  possibilities  of  reducing  them.  Re- 
sults must  be  so  reliable  that  the  costs  may  be  used  as 
a  basis  for  predicting  future  shop  operations  and  costs. 
A  cost-keeping  system  that  simply  records  costs  for 
the  purpose  of  fixing  sales  prices  has  accomplished 
only  a  small  part  of  its  mission,  and  every  day  shows 
an  increasing  tendency  to  demand  of  the  cost-keeping 
department  that  it  furnish  each  activity  of  the  enter- 
prise such  financial  statements  as  will  act  as  safe- 
guards in  the  conduct  of  its  individual  functions. 

A  good  cost  system  properly  conducted  should  en- 
able the  manager  to  prepare  estimates  with  some  as- 
surance that  a  profit  will  be  made  if  the  work  is  under- 


IMPORTANCE  OF  COST  FINDING  3 

taken,  and  at  the  sanie  time  should  enable  him  to  meet 
competition  on  an  intelligent  basis.  It  should  tell  him 
what  lines  of  product  pay  and  what  do  not.  It  should 
enable  him  to  gauge  the  efficiency  of  each  department 
and  to  trace  the  reasons  for  inefficiency  if  such  exist. 
It  should  be  his  guide  and  counselor  in  directing  the 
activities  of  his  business.  On  the  other  hand,  care 
must  be  exercised  that  the  system  installed  is  not  too 
complex  and  that  the  cost  of  secui'ing  the  detailed  in- 
formation is  not  greater  than  the  gain  that  may  result 
from  its  possession.  Complexity  is  no  assurance  of 
accuracy.  And  an  over-complex  system  may  not  only 
secure  results  that  are  useless  but  may  be  an  actual 
hindrance  to  rapid  production,  thru  too  much  "red 
tape." 

3.  Trained  men  required. — As  will  be  seen  later, 
there  is  almost  no  end  to  the  detail  to  which  a  cost- 
finding  system  may  be  carried.  In  the  hands  of  an 
overzealous  accountant  or  one  whose  range  of  vision 
is  narrowed  by  the  intricacies  of  his  calling,  an  over- 
elaborate  system  may  be  installed  that  not  only  will 
result  in  financial  loss,  thru  the  expense  of  operating 
the  cost-finding  machinery,  but  also  as  has  been  noted, 
may  act  as  a  clog  on  the  actual  macliinery  of  produc- 
tion. The  introduction  of  a  satisfactory  cost  system 
requires,  therefore,  more  than  a  knowledge  of  cost- 
finding  methods.  It  requires  an  intimate  knowledge 
of  the  industry  itself,  of  the  particular  institution,  and 
a  keen  discrimination  regarding  the  detail  to  which 
the  cost  finding  is  to  be  carried.     Very  rough  detail 


4  COST  FINDING 

costs  may  be  satisfactory  in  some  lines  while  very  re- 
fined cost  statements  may  be  essential  in  others.  Even 
in  the  same  establishment  the  same  degree  of  detail 
accuracy  is  not  necessary  in  all  lines,  and  a  skilled 
cost  accountant  can  save  large  sums  in  the  operation 
of  his  system  by  a  careful  observance  of  the  relative 
importance  of  different  lines  of  product. 

For  these  reasons  the  installation  of  a  cost-finding 
system  should  not,  usually,  be  left  wholly  to  the  gen- 
eral accountant.  It  is  true,  of  course,  that  the  cost 
books,  for  best  results,  should  be  properly  merged  into 
the  general  accounts  and  should  fit  into  the  broad  plan 
of  the  general  scheme  of  accounting.  But  the  cost- 
finding  methods  that  will  produce  best  results  will,  in 
general,  be  the  result  of  the  joint  labors  of  the  skilled 
accountant  and  the  manufacturing  expert.  A  care- 
ful distinction  should  be  made  between  principles  and 
the  detail  to  which  the  application  of  these  principles 
may  be  carried.  The  principles  of  cost  accounting 
are  definite  and  permanent,  but  the  degree  of  detail 
to  which  it  is  desirable  to  carry  their  application  can  be 
fixed  only  by  some  one  well  versed  in  the  details  of 
manufacturing,  who  knows  just  what  results  are  de- 
sirable and  what  results  are  useless. 

Even  the  manufacturing  expert  and  the  skilled  ac- 
countant can  obtain  much  help  by  considering  the  re- 
quirements of  other  departments.  Thus  the  clerical 
work  and  accuracy  of  cost  finding  are  greatly  aided 
by  a  proper  system  of  nomenclature  and  identifica- 
tion.    Such  matters  involve  the  work  of  the  design- 


IMPORTANCE  OF  COST  FINDING  S 

ing  department,  and  a  system  in  the  drafting  room 
laid  out  with  reference  to  the  cost-finding  system  is 
an  invaluable  aid. 

4.  Each  business  requires  individual  study. — It  is 
obvious  also  that  no  particular  cost-finding  system  will 
apply  to  all  forms  of  industrj^  since  industries  vary 
so  widely  not  only  as  regards  the  character  of  the 
work  they  are  conducting  but  also  as  regards  the  man- 
ner of  their  organization.  The  information  that  the 
cost  system  should  gather,  and  the  manner  in  which 
this  information  should  be  presented,  will  also  vary 
widely  in  different  enterprises.  The  cards  and  forms 
w^hich  are  admirable  for  one  kind  of  work  are  useless, 
therefore,  in  others.  The  general  underlying  princi- 
ples of  cost  finding  are,  however,  universally  applica- 
ble and  if  the  principles  are  clearly  understood  there 
is  seldom  any  difficulty  in  developing  cards  and  forms 
suitable  to  the  work  in  hand.  Many  good  suggestions 
can  be  obtained  by  a  study  of  the  blanks  and  forms 
found  in  current  practice,  but  the  presentation  of  too 
great  a  variety  of  such  documents  tends  to  obscure 
basic  theory.  This  book,  therefore,  deals  with  gen- 
eral principles  only,  and  only  such  blanks  and  forms 
have  been  inserted  as  are  necessary  to  illustrate  these 
principles. 

5.  Importance  to  whole  industries. — While  accur- 
ate costs  are  of  great  importance  to  the  individual  in- 
stitution, they  are  of  no  less  importance  to  the  industry 
as  a  whole.  The  manufacturer  who  obtains  contracts 
by  underbidding  his  competitors,  with  a  price  on  which 


6  COST    FINDING 

he  will  lose  money,  not  only  ruins  his  own  business  but 
destroys  that  of  his  competitors.  This  form  of  com- 
petition is  the  most  dangerous  and  the  most  greatly 
to  be  feared,  since  it  rests,  in  most  cases,  on  ignorance. 
It  is  little  consolation  to  the  manager  whose  costs  are 
accurately  obtained  to  see  such  competitors  go  into 
bankruptcy;  for,  as  fast  as  they  disappear,  others 
equally  ignorant  take  their  place.  This  state  of  affairs 
is  far  too  common. 

In  a  competition  that  came  under  the  writer's  ob- 
servation recently,  the  highest  bid  was  nearly  fifty  per 
cent  higher  than  the  lowest.  After  making  allow- 
ance that  the  lowest  bid  may  contemplate  scant  fulfil- 
ment of  the  specifications,  and  that  the  highest  may 
be  simply  hopeful  advertising,  the  only  reasonable  ex- 
planation that  can  be  offered  for  such  a  great  range 
is  ignorance  of  basic  cost-finding  principles.  Any  one 
who  has  had  experience  in  opening  competitive  bids 
will  testify  to  the  wide  divergence  in  prices  that  usu- 
ally appears  in  such  competition.  It  is  for  reasons 
such  as  these  that  the  intelligent  manufacturer  often 
finds  himself  confronted  with  the  fact  that  his  bid 
must  be  based  on  market  prices  and  not  on  his  costs. 
It  is  no  use  to  bid  higher,  unless  he  has  a  superior 
article  the  merit  of  which  commands  the  trade  irre- 
spective of  price.  On  standard  articles  the  "trade 
will  not  stand"  the  higher  price.  Even  here  his  only 
hope  of  succeeding  is  to  know  the  true  cost  and  to  try, 
by  better  manufacturing,  so  to  reduce  it  as  to  leave 
him  a  margin  of  profit. 


IMPORTANCE    OF    COST    FINDING  7 

Furthermore,  it  is  only  too  often  held  that  cost- 
finding  methods  are  secret  matters  that  should  be 
kept  from  the  eyes  of  competitors.  No  doubt  it  may 
be  good  business  policy  to  keep  actual  costs  secret,  but 
the  widest  publicity  should  be  given  to  cost-finding 
methods  if  for  no  other  reason  than  that  of  educating 
one's  competitor  in  such  methods  as  shall  tend  to  fair 
competition.  This  is  now  clearly  recognized  in  many 
other  fields  of  industry.  The  National  Machine  Tool 
Builders'  Association  recognized  this  important  prin- 
ciple some  years  ago  and  took  active  steps  toward  uni- 
form methods.  It  would  pay  all  competing  indus- 
tries to  do  likewise  and  to  publish  freely  the  correct 
methods  by  which  the  costs  of  their  products  are  ob- 
tained. The  manager  who  offered  to  send  his  expert 
accountant,  at  his  own  expense,  to  teach  competitors 
liis  system  of  cost  finding  was  a  man  of  keen  business 
ability  and  not  simply  a  philanthropist. 

6.  Inadequacy  of  crude  methods. — It  is  true,  of 
course,  that  many  enterprises  make  money  with  the 
crudest  kind  of  cost-keeping  systems,  but  where  such 
is  the  case  there  are  always  advantageous  conditions 
the  continued  existence  of  which  cannot  elsewhere  be 
assumed.  Many  plants,  also,  make  money  in  spite  of 
antiquated  machinery  and  methods,  either  because  of 
local  advantages  or  because  lack  of  competition  allows 
large  profits.  Strong  leadership  may  often  compen- 
sate for  material  disadvantages.  But  such  favoring 
conditions  may  not  be  so  easy  to  maintain  in  the  fu- 
ture.   As  industry  grows,  competition  becomes  ever 


8  COST  FINDING 

keener  in  all  branches  of  life,  with  the  consequent  re- 
quirement of  a  more  exact  knowledge  of  the  details 
of  business.  And  as  any  enterprise  increases  in  size 
the  methods  based  merely  on  personal  observation  be- 
come increasingly  inadequate. 

A  grocer  who  fixed  the  selling  price  of  sugar  with 
reference  to  that  of  his  competitor,  and  not  with  refer- 
ence to  what  it  had  cost  him,  would  be  considered  as 
having  adopted  a  decidedly  unsafe  policy.  And  yet 
this  is  a  common  method  of  fixing  prices  in  the  manu- 
facturing field.  Many  manufacturers  often  persist 
in  paying  dividends  out  of  capital  simply  because  they 
do  not  know  what  their  selling  price  ought  to  be  but 
have  fixed  it  either  by  that  of  some  competitor  or  by 
some  rule  of  thumb.  Enterprises  of  this  kind  col- 
lapse like  houses  of  cards  when  dull  times  arrive,  and 
constitute,  no  doubt,  a  large  proportion  of  the  failures 
which  are  due  to  personal  incompetence.  Accurate 
knowledge  of  the  cost  of  production  is  an  absolute 
necessity,  and  the  detail  in  which  it  is  required  to 
know  these  costs  grows  daily  with  the  growth  of  enter- 
prises, the  increase  in  competition  and  the  develop- 
ment of  new  methods  of  management. 

REVIEW 

What  reasons  would  influence  you  to  establish  a  cost-finding  system 
in  your  own  business  ? 

What  effect  upon  your  decision  would  the  following  factors  have: 
size  and  character  of  the  business;  expense  of  installation  and  op- 
eration ? 

If  the  selling  prices  of  the  product  that  you  are  manufacturing 


IMPORTANCE  OF  COST  FINDING  9 

are  regulated  primarily  by  competition,  would  you  consider  it 
advisable  to  instal  a  cost  system?     Why? 

What  benefits  would  you,  as  a  manufacturer,  derive  from  the 
adoption  of  a  uniform  system  of  cost  finding  in  the  industry,  and. 
would  they  lead  you  to  cooperate  freely  in  the  plan? 


CHAPTER  II 

PROBLEMS  OF  COST  FINDING 

1.  Bookkeeping,  accounting  and  cost  finding. — A 
clear  conception  should  be  had  of  the  relation  between 
accounting,  bookkeeping  and  cost  finding.  Account- 
ing is  the  science  of  recording  transactions  in  terms  of 
monc}',  which  is  the  measure  of  all  commercial  and 
productive  performances.  Where  properly  conceived 
it  is  of  much  wider  scope  than  bookkeeping,  with  which 
it  is  often  considered  identical.  Bookkeeping  is,  more 
strictly  speaking,  the  clerical  work  of  recording  trans- 
actions, but  accounting  goes  further  and  deduces 
financial  statements  that  may  serve  as  safe  guides  for 
the  conduct  of  the  business.  Almost  any  one  can  in- 
troduce a  system  of  bookkeeping  that  will  show  the 
balances  and  general  results  of  the  business,  but  to  lay 
out  an  accounting  system  that  will  anticipate  future 
performances  and  guide  the  manager  safely  where  the 
details  are  so  great  as  to  be  beyond  his  grasp^  is  a  dif- 
ferent matter. 

Cost  finding  is  that  part  of  general  accounting 
which  deals  with  the  finding  of  the  detail  costs  which 
make  up  the  general  or  summarized  costs.  It  is, 
therefore,  closely  connected  with  shop  processes  and 
shop  management,  and  the  cost  keeper  usually  is 

10 


PROBLEMS  OF  COST  FINDING  11 

placed  directly  under  the  manufacturing  superinten- 
dent. Cost  finding  can  be  carried  on  with  little  ref- 
erence to  the  general  accounts,  and  this  practice  is  not 
uncommon.  The  general  books  should  always  show 
accurately  the  totals  of  all  labor  and  material  that 
have  been  purchased  for  any  and  all  purposes,  and 
also  all  receipts  for  sales,  without  regard  to  the  de- 
tails as  to  how  these  expenditures  and  receipts  were 
brought  about.  It  is  clear  also  that  these  totals,  as 
shown  by  the  general  accounts,  can  be  accurately 
determined,  since  they  are  based  upon  purchase 
orders,  pay-rolls,  bills  of  sale  and  similar  doc- 
uments. It  is  clear,  also,  that  these  general  sum- 
maries will  show  whether  the  business  is  prospering 
or  not  and  will  show  also  whether  the  prices  asked 
are,  in  general,  sufficiently  high  to  cover  all  expendi- 
tures and  insure  a  profit.  However,  if  it  is  desired 
to  know  something  regarding  the  detailed  cost  of  some 
particular  job  or  article  this  information  can  be  ob- 
tained only  by  opening  a  special  ledger  account  with 
it.  In  small  enterprises  this  is  sometimes  done,  but 
in  undertakings  of  any  magnitude  such  a  procedure 
would  lead  to  undesirable  complexity  and  extent  in 
the  general  accounts.  Cost  accounts  are  therefore 
usually  conducted  as  an  independent  investigation, 
the  cost  summaries  not  necessarily  being  merged  into 
the  general  accounts. 

2.  Cost  accounts  a  branch  of  general  accounts. — 
For  best  results,  however,  the  cost  accounts  should  be 
treated  as  a  branch  of  the  general  accounts,  and  the 


12  COST  FINDING 

cost  summaries  should  be  merged  into  the  general  ac- 
counts. It  will  be  seen  from  the  following  discussion 
that  it  is  difficult  to  keep  absolutely  accurate  cost  ac- 
counts, and  that  the  cost  summaries  do  not  always 
agree  with  the  corresponding  totals  of  the  general  ac- 
counts. These  facts  are  sometimes  used  as  arguments 
against  cost-finding  systems  as  a  means  of  setting  sales 
prices,  but  such  arguments  are  not  valid.  Any  cost- 
finding  sj^stem  worth  considering  should  give  results 
that  can  be  reconciled  with  the  totals  of  the  general  ac- 
count with  sufficient  accurac}',  or  the  difference  should 
be  explainable  on  some  other  ground  than  that  of  in- 
accuracies in  the  cost-finding  methods.  General  ac- 
counting is  obviously  necessary  to  secure  accurate  gen- 
eral summaries,  and  cost  accounts  are  necessary  to 
show  the  details  of  each  summary  where  such  details 
are  needed.  The  two  systems  should,  therefore,  be 
related  parts  of  one  general  scheme  of  accounting. 
Evidently  the  installation  of  a  cost-finding  system 
should  be  the  joint  work  of  the  skilled  accountant  and 
the  manufacturing  expert. 

General  accounting  must  be  conducted  in  practi- 
cally every  business,  but  cost  finding,  in  a  detailed 
sense,  may  or  may  not  be  necessary,  tho,  as  before 
stated,  it  is  often  badly  needed  in  many  places  where 
it  is  not  considered  necessary. 

3.  Divisions  of  productive  industry. — To  illustrate 
these  relations,  consider  the  case  of  a  farmer  who  is 
producing  wheat,  barley,  oats,  cattle,  sheep,  poultry, 
eggs  and,  in  addition,  operates  a  small  truck  garden 


PROBLEMS  OF  COST  FINDING  13 

where  lie  grows  a  number  of  varieties  of  vegetables. 
Under  the  old  methods  which  were  practised  a  few 
years  ago,  his  farm  and  the  labors  of  his  family  and 
himself  would  perhaps  supply  him  with  practically 
every  need.  Accounting  was  hardly  needed,  since 
he  could  see  the  state  of  his  resources.  But  under 
present  conditions  he  must  buy  many  of  his  necessi- 
ties; if  he  hires  helpers  tliey  must  be  paid  in  money, 
which  can  be  obtained  only  Ly  selling  the  products  of 
his  farm.  He  must,  therefore,  add  to  his  labors  as  a 
producer  both  those  of  a  buyer  and  those  of  a  seller. 
It  now  becomes  increasingly  difficult  for  him  to  carry 
the  records  of  his  many  transactions  in  his  head,  and 
he  must  proceed  to  write  them  down  in  some  orderly 
and  systematic  manner,  thus  adding  accounting  to  his 
required  duties.  The  growth  of  the  farmer's  activi- 
ties also  brings  about  added  financial  responsibilities 
to  which  special  attention  must  be  devoted.  Thus,  he 
may  be  compelled  periodically  to  borrow  money  in 
order  to  hai-vest  his  crop  promptly  or  to  perform  a 
large  amount  of  plowing  in  a  short  time.  The  essen- 
tial features  of  productive  industry,  in  short,  are  buy- 
ing, producing,  financing,  transporting  to  market, 
selling  and  accounting.  In  most  cases  buying  is  con- 
sidered as  a  part  of  producing,  and  transportation  to 
market  as  a  part  of  selling,  so  the  four  divisions  of 
production  are  manufacturing  or  growing,  financing, 
selling  and  accounting. 

If,  now,  this  farmer  is  prosperous,  he  may  keep 
only  such  accounts  as  deal  with  his  receipts  and  dis- 


14)  COST  FINDING 

bursements.  He  will  record  all  purchases  for  ferti- 
lizer, machinery,  insurance,  repairs,  drain  tile,  etc.,  and 
will  also  record  all  money  received  from  sales  of  pro- 
duce. The  balances  from  these  general  accounts  will 
always  inform  him  how  he  stands,  as  a  whole,  with  his 
business  world. 

4.  When  cost  records  become  necessary. — But  sup- 
pose he  is  not  prospering,  or  suppose  he  wishes  to 
know  what  lines  of  effort  are  giving  him  his  highest 
returns.  He  then  nmst  begin  to  keep  an  individual 
account  with  each  activity  into  which  he  wishes  to 
inquire.  Many  farmers  of  the  better  informed  class 
now  keep  records  of  each  cow  or  even  of  each  hen  in 
making  economic  studies  of  this  kind.  Almost  in- 
stantly, however,  the  farmer  under  discussion  jSnds 
that  these  individual  cost  accounts  are  decidedly  differ- 
ent in  character  from  the  general  accounts  he  has 
been  keeping.  The  general  accounts  were  accurate 
and  he  could  account  fully  for  all  the  items  entering 
therein.  But  these  individual  accounts  contain  items 
that  are  not  definite. 

For  instance,  the  same  man  that  feeds  the  cattle 
helps  to  market  the  eggs.  The  insurance  on  the  barn 
is  chargeable  partly  to  one  activity  and  partly  to  an- 
other. Some  of  the  general  supplies  which  he  has 
purchased  spoil  on  his  hands;  other  supplies  are  not 
fully  accounted  for,  because  of  waste,  or  failure  to 
obtain  accurate  account  of  their  distribution.  Some 
of  the  supplies  that  he  has  purchased  are  used  in  so 
many  different  activities  that  he  finds  it  difficult  to 


PROBLEMS   OF  COST  FINDING  15 

apportion  them  with  any  semblance  of  accuracy.  He 
also  finds  it  practically  impossible  to  apportion  his 
labors  accurately  in  his  truck  garden  over  the  many 
products  grown  therein.  He  must,  therefore,  be  con- 
tent with  approximation  to  a  certain  extent  in  making 
up  these  accounts.  The  greater  the  detail  into  which 
he  wishes  to  go  the  more  difficult  it  becomes  to  segre- 
gate the  costs  of  the  several  lines  of  effort  with  which 
he  is  concerned.  It  is  clear,  however,  that  by  making 
intelligent  approximations  he  can  separate  the  cost  of 
his  several  activities  so  as  to  obtain  a  fairly  clear  view 
of  their  relative  values,  and  if  these  approximations 
are  skilfully  made  the  summaries  of  his  cost  accounts 
should  coincide  fairly  well  with  those  of  his  general 
accounts.  This  particular  difference  between  gen- 
eral accounts  and  cost  accounts  should  be  carefully 
noted.  The  general  accounts  must  be  accurate  and 
must  balance ;  cost  accounts  are  seldom  exact  and  it  is 
often  difficult  to  make  their  summarized  totals  agree 
closely  with  those  of  corresponding  general  accounts 
which  are  based  on  much  more  accurate  statements. 

If  this  farmer  is  very  progressive  or  has  a  specula- 
tive mind,  he  may  record  the  relative  costs  of  pro- 
ducing different  products  under  varying  conditions, 
with  a  view  to  guiding  himself  in  future  work.  That 
is  to  say,  he  begins  to  collect  statistical  data  based  on 
his  cost  accounting  which  will  enable  him  to  predict, 
in  some  degree  at  least,  the  results  of  future  efforts. 
This  was  once  a  secondary  feature  of  cost  accounting, 
but  it  now  bids  fair  to  be  as  important  as  the  original 

XII— 3 


16  COST  FINDING 

function  performed  by  cost-finding  methods,  namely, 
that  of  finding  out  what  the  actual  costs  of  produc- 
tion are. 

The  general  principles  underlying  the  fanner's  cost 
records  are  applicable  to  all  branches  of  productive 
industry  tho  the  methods  of  applying  them  may  vary 
widely.  The  illustration  of  the  farmer  was  purposely 
selected  to  show  that  these  principles  apply  even  to 
handicraft  production  of  the  simplest  kind.  A  brief 
consideration  of  any  of  the  handicraft  callings,  par- 
ticularly as  they  grow  in  magnitude,  will  disclose 
analogous  conditions,  and  will  assist  in  making  clearer 
the  increasing  complexity  of  these  principles  as  they 
appear  in  large  modern  factories.  It  is  in  the  highly 
organized  modern  factory  that  the  greatest  complexity 
is  met;  the  following  discussion  is  therefore  directed 
largely  to  factory  methods.  The  general  applica- 
tion, however,  should  not  be  lost  sight  of. 

5.  Application  to  manufacturing  plants. — One  of 
the  most  marked  and  important  characteristics  of  mod- 
ern industry  is  the  tremendously  extended  use  of  the 
principle  of  division  of  labor.  While  this  principle 
is  inherent  in  the  formation  of  civilized  society  and  has 
been  used  by  mankind  from  the  beginning,  the  mod- 
ern industrial  era  has  extended  its  use  in  a  most 
remarkable  degree.  The  installation  of  highly  devel- 
oped and  specialized  machinery  has  aided  materially 
in  furthering  the  use  of  this  principle.  The  produc- 
tion of  the  smallest  article  may  be  the  work  of  many 
hands.     One  man  may  plan  or  design  it,  another  may 


PROBLEMS  OF  COST  FINDING  17 

make  tools  for  its  production,  many  others  may  work 
on  individual  operations,  not  even  knowing  what  sort 
of  article  the  several  parts  are  intended  for;  while 
others,  who  may  not  have  seen  a  single  part  manu- 
factured, may  assemble  the  completed  product.  The 
cost  of  any  manufactured  article,  therefore,  may  be 
made  up  of  the  cost  of  small  portions  of  labor  of  many 
men,  some  of  whom  may  work  directly  upon  the 
article  and  some  of  whom  may  work  only  indirectly 
upon  it.  As  in  the  case  of  the  farmer,  it  may  not  be 
easy  to  compute  just  what  the  exact  total  cost  of  the 
final  product  may  be. 

A  diagrammatic  outline  of  the  essential  factors  in 
any  productive  enterprise  is  shown  in  Figure  1  (page 
18).  No  matter  how  complex  the  ownership  of  a 
plant  may  be,  it  can  be,  and  usually  is,  reduced  to  a 
board  of  directors  or  some  similar  group  which  repre- 
sents the  owning  body,  and  dictates  the  general  policy 
of  the  enterprise.  These  directors  in  turn  may  be 
represented  by  the  president  or  general  manager  who 
is  in  actual  charge  of  the  plant.  They  may  also  elect 
such  officers  as  the  secretarj^  and  the  treasurer  to  serve 
as  independent  checks  on  the  operation  of  the  busi- 
ness. Under  the  president  are  the  four  main  branches 
or  departments  of  operation  already  noted,  namely, 
producing,  selling,  financing  and  accounting.  If  the 
plant  is  owned  by  partners  or  by  an  individual  the 
organization  is,  of  course,  simplified,  and  where  the 
plant  is  small,  one  individual  may  perform  several 
of  the  foregoing  functions.     The  general  idea,  how- 


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OR  BY  PURCHASE 

Q   " 

o : 

DC  - 
Q. 

PH 


18 


PROBLEMS  OF  COST  FINDING  19 

ever,  of  the  four  main  branches  should  not  be  lost 
sight  of,  no  matter  how  much  the  detail  arrangements 
of  the  administration  may  vary.  For  instance,  in 
some  cases  the  engineering  department  is  so  impor- 
tant as  to  be  placed  directly  under  the  general  man- 
ager, but  this  is  purely  an  administrative  matter  and 
does  not  affect  the  principles  presented,  the  engineer- 
ing department  being  strictly  a  branch  of  the  pro- 
duction department.  Such  an  arrangement  is,  in 
fact,  another  manifestation  of  the  advantage  of  divi- 
sion of  labor.  Formerly  all  engineering  planning  was 
done  in  the  shop  as  the  work  progressed,  and  often  by 
haphazard  methods.  Experience  has  shown  that  bet- 
ter and  more  economical  results  are  obtained  when 
this  work  of  planning  is  in  the  hands  of  specialists. 
Similar  remarks  would  apply  to  industries  where  other 
kinds  of  highly  trained  specialists,  such  as  chemists, 
for  example,  are  employed. 

6.  Departments  not  always  fully  developed. — It 
may  be  noted  that  the  degree  to  which  some  of  these 
departments  may  be  developed  in  any  one  industry 
or  enterprise  may  varj^  widely  with  conditions.  Some 
concerns  have  only  very  rudimentary^  sales  depart- 
ments, depending  on  other  organizations  to  dispose  of 
their  product.  In  other  cases  the  sales  organization 
may  be  highly  developed  and  it  is  not  uncommon 
that  the  cost  of  marketing  a  commodity  is  equal  to, 
or  greater  than,  the  actual  cost  of  production.  Other 
enterprises,  again,  may  do  little  or  no  purchasing 
of  materials  except  for  machinery  and  repairs,  having 


80  COST  FINDING 

acquired  once  for  all  such  natural  sources  of  supply 
as  are  necessary  for  their  purpose.  Still  other  en- 
terprises do  no  producing,  in  a  strict  sense,  the  pur- 
chasing department  taking  the  place  of  the  produc- 
tion department  which  is  so  prominent  a  feature  of 
other  industries.  Thus  a  mercantile  concern  simply 
buys  finished  or  marketable  goods  and  sells  them 
again.  The  general  principles  involving  all  four 
functions  should  not  be  forgotten,  however,  and  ac- 
counting, as  has  already  been  noted,  must  always  be 
carried  on,  whether  the  enterprise  in  question  does 
buying,  producing,  or  selling,  or  all  three  combined. 
7.  Departmentization. — As  a  factory  grows  in  size, 
or  as  the  scope  of  the  work  broadens,  the  economic 
advantage  of  the  use  of  division  of  labor  naturally 
brings  about  departmentization.  Departmentization 
is  also  desirable  from  the  standpoint  of  administra- 
tion— and  the  entire  problem  of  cost  finding  is  closely 
connected  with  the  problems  of  organization.  A  dia- 
grammatic outline  of  the  several  departments  of  a 
typical  manufacturing  enterprise,  showing  the  rela- 
tive positions  of  the  several  departments  from  an  ad- 
ministrative standpoint,  is  shown  in  Figure  2  (page 
21).  The  four  main  divisions,  producing,  selling, 
financing  and  accounting,  are  functionalized  under  the 
general  manager,  in  the  care  of  the  sales  manager,  the 
factory  manager,  the  treasurer  and  the  accountant  or 
controller.  Under  the  factory  manager  is  organized 
the  production  department  with  its  many  sub-depart- 
ments.    Some  of  these  sub-departments  are  function- 


PROBLEMS  OF  COST  FINDING 


21 


alized  directly  under  the  factory  manager  while  others 
are  placed  under  the  factory  superintendent.  The  ar- 
rangement shown  is  suggestive  only,  tho  it  illustrates 
a  somewhat  common  arrangement  of  the  several  de- 
partments. 


ISALES  MANAGER 


lo'mc'ffl  |*OVCRTISINc( 


jL 


■CHIEF  ENGINEER 


GENERAL  MANAGER 

i 


I  FACTORY  MANAGER 


ACCOUNTANT 
i 


FACTORY  SUPT. 


T 


l 


TREASURER 

IE 


j FINANCE  j  I  PuaCM.  I 


■  WORKS  ENG'Rl 


I — • —     i     —     1     —    ;     — ; — 1 

I  TOOL  ROOM  I  j  employment!  joRDER  DEP'TJ  llNSPECTIOMJ  j      STORES      | 


■  shipping  I  [stockroom]  I  foreman  I  I  FOREMAN  I  [FOREMAN  [ 


5555555 


WORKMEN        WORKMEN        WORKMEN 

FIG.  2  DIAGRAM  OF  A   MANUFACTURING  ORGANIZATION 


It  will  be  noted  that  the  duties  and  functions  of  the 
men  in  the  various  departments  are  often  decidedly 
different  in  character.  Thus,  there  is  little  in  common 
between  the  work  of  the  shipping  room  and  that  of 
the  labor  bureau.  It  will  be  noted  also  that  many 
of  the  men  employed  do  not  work  directly  upon  the 
product.  The  engineer  in  charge  of  the  power  house, 
for  example,  does  no  work  on  the  product  itself  and 
the  power  which  his  department  produces  may  or  may 
not  be  used  on  all  products.     The  engineering  depart- 


2«  COST  FINDING 

ment  may  make  designs  for  some  jobs,'  while  for 
others  it  may  do  nothing.  Crane  men,  office  clerks, 
errand  boys,  etc.,  are  employed  on  work  that  is  gen- 
eral rather  than  specific,  and  it  is  difficult  to  apportion 
accurately  the  amount  of  time  that  the}'-  spend  on  each 
piece  of  the  factory  product.  The  proportion  of  men 
that  may  be  thus  indirectly  employed  may  be  very 
large,  and  the  modern  tendency  in  all  mass  produc- 
tion is  to  increase  this  proportion  rather  than  to  dimin- 
ish it. 

This  general  tendency  toward  departmentization 
and  division  of  labor  should  be  carefully  noted  by  the 
student  of  cost  systems.  Certain  fundamental  prin-» 
ciples  in  modern  manufacturing  methods  work  irre- 
sistibly to  increase  this  tendency.  The  four  primary 
divisions  of  a  business,  namely  producing,  selling, 
financing  and  accounting,  are  functional  divisions. 
That  is,  the  division  is  based  on  the  character  of  the 
work  performed.  Again,  under  the  factory  manager 
(see  Figure  2)  are  found  several  departments,  the 
functions  of  which  are  different.  The  designing  of 
the  product  is  separated  from  the  actual  construction, 
and  the  estimating  is  set  aside  as  the  separate  func- 
tion of  a  specialist.  The  separation  of  the  planning 
of  the  work  from  its  construction  should  be  especially 
noted.  Until  quite  recently  this  principle  had  not 
gone  far  beyond  the  separation  of  the  engineering  and 
the  construction  department.     But  recent  develop- 

1  The  author  feels  that  no  apology  is  needed  for  the  use  of  this  homely 
but  expressive  term.     There  is  no  other  word  that  fully  takes  its  place. 


PROBLEMS    OF    COST    FINDING  23 

merits  tend  to  carry  this  principle  of  the  separation 
of  the  planning  and  the  constructive  function  much 
farther  down  into  the  shop  itself.  Scientific  manage- 
ment, so  called,  is  based  intrinsically  on  a  rearrange- 
ment of  the  work  of  foremen  and  workmen  according 
to  the  functions  to  be  performed,  rather  than  accord- 
ing to  the  principles  underlining  the  enforcement  of 
discipline,  as  heretofore.  Functional  foremanship,  as 
contemplated  by  scientific  management,  has  become 
an  important  factor  in  our  present  day  industrial  or- 
ganization, and  the  tendency  toward  further  special- 
ization of  this  order  seems  to  be  growing.  Such  a  sepa- 
ration of  functions  always  increases  the  amount  of 
general,  or  indirect,  labor  and  decreases  the  amount  of 
specific,  or  direct,  labor  that  is  put  upon  the  product. 
As  the  tendency  grows,  the  necessity  of  more  accurate 
distribution  of  cost  increases  while,  at  the  same  time, 
the  difficulties  in  the  way  of  accurate  allocation  of  cost 
elements  also  become  greater;  all  of  which  points  to 
the  need  for  more  refined  cost-finding  methods  as 
competition  becomes  keener. 

REVIEW 

Differentiate  bookkeeping,  accounting  and  cost  finding. 
In  your  opinion  is  it  advisable  to  provide  for  a  control  of  the  cost 
books  by  means  of  accounts  in  the  general  books  ? 

How  would  you  prepare  for  your  own  use  charts  that  will  show: 

(a)  the  four  fundamental  branches  of  a  business  enterprise  ? 

(b)  the  diagrammatic  outline  of  a  manufacturing  business  ? 
Upon  what  fundamental  idea  is  scientific  management  based,  and 

what  are  some  of  its  features  ? 


CHAPTER  III 

PROBLEMS  OF  COST  FINDING  (Continued) 

1.  Basic  cost  problem  similar  in  all  industries. — 
It  will  be  noted,  therefore,  that  the  problem  of  cost 
finding  in  the  factory  is  little  different  from  that  of 
the  farmer  previously  discussed.  The  difference  is 
one  of  degree  rather  than  one  of  principle.  Compe- 
tition has,  however,  compelled  the  factory  owner,  in 
general,  to  look  more  closely  into  his  costs;  the  agri- 
culturist will  soon  be  compelled  by  the  same  economic 
pressure  to  do  likewise. 

Industrial  enterprises,  of  course,  vary  widely,  not 
only  in  the  character  of  the  work  they  pursue  but  also 
in  the  way  in  which  they  are  organized  and  depart- 
mentized.  Furthermore,  as  will  be  shown,  no  single 
cost-finding  system  can  be  devised  that  will  be  suitable 
for  all  enterprises.  The  importance  of  understand- 
ing correct  basic  principles  is  therefore  apparent. 

2.  Other  relations  to  general  accounting. — The 
problem  of  cost  finding  will  be  more  clearly  under- 
stood, also,  by  considering  certain  other  characteristics 
of  manufacturing  industry.  As  before  noted,  the 
general  accounts  indicate  the  general  condition  of  the 
business  and  should  also,  if  properly  conducted,  indi- 
cate the  general  tendencies  of  the  business.     Figure 

24 


PROBLEMS  OF  COST  FINDING  g5 

3  (page  26)  shows  a  typical  monthly  statement  of  the 
affairs  of  a  manufacturing  company.  In  it  the  con- 
dition of  the  assets  and  liabilities  of  the  company  un- 
der consideration  have  been  summarized.  Among  the 
"fixed"  or  "permanent"  assets  are  found  such  items  as 
buildings,  machinery  and  tools,  drawings  and  pat- 
terns, shop  furniture  and  fixtures.  These  assets  are 
not  permanent,  however,  in  the  sense  that  their  value 
does  not  change.  As  a  matter  of  fact,  they  are  con- 
stantly being  added  to  and  are  constantly  depreciating 
in  value  either  from  use  or  from  decay.  Much  of  the 
labor  expended  in  the  construction  and  repair  of  these 
utilities  is  the  work  of  men  regularly  employed,  and 
much  or  all  of  the  material  used  passes  thru  the  regu- 
lar channels  of  purchase  and  storage.  Some  of  these 
expenditures  of  labor  and  material,  however,  are  ex- 
penditures on  the  capital  account  and  add  to  the  value 
of  the  assets.  It  is  important  that  the  value  of  these 
expenditures  be  known  as  closely  as  possible,  and 
hence  they  must  not  be  confused  with  those  connected 
with  the  manufacture  of  product  for  the  market. 
Cost  finding,  therefore,  is  concerned  with,  and  must 
take  account  of,  many  other  things  besides  production 
for  the  market. 

Again,  on  the  monthly  statement  are  found  the 
values  of  raw  materials,  material  in  process,  and  fin- 
ished product;  that  is,  the  value  of  all  raw  or  un- 
worked  material,  the  value  of  all  material  passing 
thru  the  shop  and  partly  worked  into  finished  prod- 
uct, and  the  value  of  all  material  fully  completed  and 


MONTHLY  STATEMENT.  BROWN  MFG.  CO. 

MARCH  31,  19- 

APRIL  30.  19— 

OR. 

CR. 

DR. 

CR.         1 

FIXED  ASSETS 

REAL  ESTATE 

GO 

500 

00 

BUILDINGS 

200 

225 

00 

MACHINERY  AND  TOOLS 

150 

345 

00 

FACTORY  FURNITURE 

7 

240 

00 

OFFICE  FURNITURE 

2 

100 

00 

DRAWINGS  AND  PATTERNS 

100 

00 

TOTAL 

420 

510 

00 

CURRENT  ASSETS 

CASH 

7 

241 

52 

STOCKS  AND  BONDS 

2 

500 

00 

NOT^S  RECEIVABLE 

1 

250 

50 

ACCOUNTS  RECEIVABLE 

75 

240 

30 

RAW  MATERIALS 

40 

264 

18 

MATERIAL  IN  PROCESS 

50 

146 

15 

FINISHED  PRODUCT 

20 

240 

24 

GOODS  ON  CONSIGNMENT  OUTWARD 

5 

140 

10 

DEFERRED  CHARGES 

1 

240 

00 

TOTAL 

203 

262 

99 

FIXED  LIABILITIES 

FUNDED  DEBTS 

MORTGAGE  BONDS 

10 

000 

00 

MORTGAGES 

5 

000 

00 

TOTAL 

15 

000 

00 

CURRENT  LIABILITIES 

NOTES  PAYABLE 

35 

000 

00 

ACCOUNTS  PAYABLE 

52 

246 

15 

PAYROLL 

3 

218 

16 

TAXES  ACCRUED 

1 

240 

12 

INTEftEST  ACCRUED 

400 

20 

RESERVES 

1 

240 

14 

TOTAL 

93 

344 

77 

NET  WORTH 

CAPITAL  STOCK 

COMMON 

375 

000 

00 

PREFERRED 

100 

000 

00 

SURPLUS  AT  FIRST  OF  YEAR 

21 

245 

16 

NET  PROFIT  TO  DATE 

19 

183 

06 

TOTAL 

515 

428 

22 

GRAND  TOTAL 

623 

772 

99 

623 

772 

99 

___ 

^^^ 

FiGUBJE    3 

26 


PROBLEMS  OF  COST  FINDING  27 

in  the  stockroom.  Obviously  the  general  accountant 
has  no  place  in  his  books  for  the  myriad  accounts  of 
details  occasioned  by  the  constant  flow  of  material 
thru  the  shop.  Yet  it  is  important  that  this  informa- 
tion be  at  hand  periodically,  and  it  must  be  correct  if 
it  is  to  be  of  any  use.  Formerly  it  was  considered 
sufficient  if  the  balance  sheet  were  drawn  off  yearly, 
the  value  of  all  material,  raw,  worked  and  in  process 
being  commonly  obtained  by  actual,  visual  appraisal. 
While  such  an  appraisal  is  still  a  very  valuable  pro- 
cedure as  a  check,  every  modern  accounting  system 
requires  a  monthly  statement  like  Figure  3,  and  some 
of  the  items  shown  can  be  obtained  only  thru  a  cost- 
finding  system  that  keeps  constant  and  accurate  ac- 
count of  all  movements  of  material  and  expenditures 
for  labor.  The  cost  keeper  carries  a  separate  ac- 
count with  each  factory  order,  recording  its  increasing 
value  as  it  progresses.  When  the  accounting  period 
arrives  he  adds  up  his  accounts,  checks  the  balances 
against  the  total  value  of  material  issued  and  labor 
expended,  and  reports  the  total  amount  to  be  trans- 
ferred from  "material"  to  "work  in  progress"  and 
from  "work  in  progress"  to  "finished  product." 

The  monthly  statement  illustrated  in  Figure  3 
shows  in  a  concise  manner  the  status  of  all  of  the  im- 
portant activities  of  the  business.  Clearly,  good  cost 
finding  should  not  stop  at  recording  the  values  of  the 
items  just  dicussed.  Just  as  Figure  3  is  of  great 
value  in  judging  the  general  tendencies  of  the  busi- 
ness, so  more  detailed  reports  of  the  several  activities 


28  COST  FINDING 

of  the  enterprise  show  the  reasons  for  these  tendencies, 
and  the  furnishing  of  these  detailed  reports  is  a  most 
important  function  of  a  good  cost-finding  system. 

3.  Functions  of  cost  finding  summarized. — It  ap- 
pears, therefore,  that  the  requirements  of  a  good  cost- 
finding  system  extend  far  beyond  the  abihty  to  find 
the  cost  of  marketable  product.  Its  function  as  a 
means  of  predicting  future  performance  has  already 
been  noted,  and  to  these  may  now  be  added  the  third 
function,  namely,  that  of  supplying  a  basis  for  mana- 
gerial reports.  Summarized,  then,  these  require- 
ments are: 

(a)  To  record  the  results  of  operations. 

(b)  To  furnish  a  basis  for  the  prediction  of  future 
operations. 

(c)  To  supply  a  basis  for  managerial  reports. 
The  last  two  items  will  be  discussed  in  a  later  section, 
and  the  discussion  for  the  present  will  be  confined  to 
the  first  item.  The  relation  that  should  exist  between 
the  general  books  and  the  cost  books  will  be  clearer 
after  a  discussion  of  the  problems  of  cost  finding,  so 
this  topic  will  also  be  deferred. 

4.  Complexity  of  costs. — From  what  has  been  said 
it  is  clear  that  the  cost  of  any  manufactured  article  is  a 
complex  quantity.  The  manufacturer  buys  supplies 
which  he  classifies  as  raw  or  unworked  material.  On 
this  material  a  certain  amount  of  actual  labor  is  per- 
formed by  his  men.  Obviously  it  is  not  difficult  to 
obtain  a  fairly  accurate  account  both  of  the  cost  of  the 
material  used  and  of  the  actual  labor  bestowed  upon 


PROBLEMS  OF  COST  FINDING  29 

it,  since  these  two  elements  of  cost  are  paid  for  di- 
rectly in  money.  But,  in  addition,  it  appears  from 
Figure  2  (page  21 )  that  many  men  must  be  employed 
who  do  not  work  directly  upon  the  product,  yet  their 
wages  are  certainly  a  part  of  the  cost  of  production." 
In  addition  also  to  the  material  that  goes  directly  into 
the  product  there  is  much  material  that  must  be  used 
to  carry  on  the  work,  tho  it  does  not  enter  into  th6 
product.  Thus  coal,  oil,  waste,  etc.,  are  chargeable 
against  production,  tho  they  do  not  enter  directly  into 
the  product.  And,  finally,  there  are  many  other  items 
of  expenditure,  such  as  insurance  and  taxes,  that  are 
neither  labor  nor  material,  but  which  must  be  in- 
cluded in  the  completed  cost,  tho  they  cannot  be 
connected  directly  with  any  particular  piece  of  prod- 
uct. 

5.  Direct  and  indirect  material. — Material  which 
enters  directly  into  the  product  is  known  as  direct 
material  or  more  simply  as  material.  All  material 
which  is  chargeable  against  production,  but  which 
does. not  enter  directly  into  the  product  is  called  in- 
direct or  expense  material. 

Occasionally  material  enters  directly  into  produc- 
tion in  such  small  quantities  as  to  make  accurate  ac- 
counting impracticable.  Thus  glue,  screws,  nails, 
etc.,  may  be  used  directly  in  production  but  not  in 
quantities  large  enough  to  be  worth  noting,  so  far  as 
any  one  piece  of  product  is  concerned.  They  are 
then  treated  as  indirect  material. 

The  iron,  copper,  insulation,  etc.,  that  enter  di- 


so  COST  FINDING     , 

rectly  into  the  construction  of  a  machine  would  be 
classijfied  therefore  as  direct  material.  The  coal  used 
in  heating  the  factory  and  the  oil  used  in  lubricating 
the  machinery  of  production,  while  not  entering  di- 
rectly into  the  construction  of  the  machine  in  ques- 
tion, are  essential  to  its  production,  and  a  portion  of 
them  are  justly  chargeable  against  it;  they  would  be 
classified  as  indirect  material. 

6.  Direct  and  indirect  labor, — Labor  which  is  ex- 
pended directly  upon  the  product  is  called  direct  labor, 
productive  labor,  or  more  simply,  labor.  Thus  the 
work  of  a  machine  operator  would  be  classified  as  di- 
rect labor,  and  his  wages  would  be  chargeable  directly 
to  the  parts  on  which  he  works,  in  proportion  to  the 
time  he  spends. 

All  labor  chargeable  against  production,  but  which 
is  not  directly  connected  with  some  particular  piece  of 
work,  is  called  indirect  or  nonproductive  labor.  For 
example,  the  wages  of  firemen,  crane  tenders  and 
clerical  assistants  cannot,  in  general,  be  connected  with 
any  particular  piece  of  production.  Yet  they  are 
just  charges  against  production  and  must  be  included 
in  the  costs. 

The  terms  "direct"  and  "indirect"  are  much  prefer- 
able to  "productive"  and  "nonproductive."  All  labor 
is  productive,  strictly  speaking,  tho  it  may  not  all  be 
expended  directly  on  the  product. 

7.  Burden  or  expense. — It  is  not  difficult  to  allocate 
the  direct  labor  and  the  direct  material  which  go  into 
any  piece  of  product,  but  it  is  exceedingly  difficult,. 


PROBLEMS  OF  COST  FINDING  31 

often,  to  charge  each  piece  of  product  with  its  correct 
share  of  indirect  material,  indirect  labor  and  the  other 
items  of  expense  not  directly  connected  with  produc- 
tion, such  as  clerical  salaries,  insurance,  etc.  All 
these  indirect  charges  are,  therefore,  usually  gathered 
into  lump  sums,  as  will  be  described  hereafter,  under 
the  name  of  burden,  overhead  expense  or,  more  simply, 
expense.  The  great  problem  of  cost  finding  is  to 
distribute  this  burden  or  expense  properly  and  justly 
over  the  product  so  that  each  article  shall  bear  its  own 
share,  and  only  its  own  share,  of  expense.  In  general, 
this  cannot  be  accomplished  with  great  accuracy,  but, 
as  will  be  seen,  approximations  can  be  made  that  are 
sufficiently  accurate  for  most  cases. 

8.  General  classification  of  expense. — The  cost  of 
the  selling  department  and  the  accounting  department 
is  of  the  indirect  kind,  and  hence  is  included  in  the 
expense.  But,  as  has  been  noted,  these  functions  are 
independent  of  production,  are  under  their  own  offi- 
cers, and  the  latter  should  be  held  strictly  account- 
able for  their  own  expenditures.  The  manufactur- 
ing superintendent  should  be  held  accountable  only 
for  the  costs  of  actual  production,  and  the  cost  books 
should  show  tlie  relative  proportions  of  expense 
chargeable  to  each  department.  Expense,  therefore, 
is  divided  into  manufacturing  or  factory  expense,  ad- 
ministrative or  office  expense,  and  selling  expense. 
In  many  instances  the  administrative  expense  is  small 
compared  with  the  selling  expense,  and  the  two  are 
grouped  together  under  the  name  of  general  or  com- 

XII — 4 


S2  COST  FINDING 

mercial  expense.  It  will  be  assumed  for  the  present 
that  this  grouping  is  sufficiently  accurate  for  the  dis- 
cussion that  follows,  but  the  general  principle  should 
be  borne  in  mind.  It  is  often  highly  important  that 
the  cost  of  the  sales  should  be  carefully  separated  from 
the  administrative  or  office  expenses,  in  order  to  lo- 
cate expenditures  accurately  and  to  fix  responsibility 
beyond  question;  and  where  the  selling  expense  is 
large  compared  with  other  expenses  this  separation 
should  always  be  made. 

9.  Elements  of  total  cost. — It  appears,  therefore, 
that  the  most  natural  primary  divisions  of  manu- 
facturing cost  are  direct  material,  direct  labor,  and 
manufacturing  or  factory  expense.  It  is  often  cus- 
tomary to  omit  the  qualifying  word  and  speak  of  di- 
rect material  and  direct  labor  simply  as  material  and 
labor.  The  sum  of  the  direct  material  and  the  direct 
labor  is  known  as  the  flat  or  prime  cost.  The  sum  of 
the  prime  cost  and  the  factory  expense  is  the  shop 
cost,  known  also  as  the  factory  cost  or  manufacturing 
cost.  The  factory  cost  includes  all  expenditures  for 
which  the  manufacturing  superintendent  is  held  re- 
sponsible. The  factory  cost  includes,  therefore,  all 
items  properly  chargeable  against  the  product  up  to 
the  time  of  its  delivery  upon  the  shipping  floor  or  to 
the  stockroom,  according  to  its  destination.  The  sum 
of  the  factory  cost  and  the  general  expense  is  the  total 
cost,  and  the  total  cost  plus  the  profit  is  the  selling 
price. 

Naturally  the  relative  proportions  of  these  several 


PROBLEMS  OF  COST  FINDING 


33 


items  will  vary  with  the  enterprise.  In  Figure  4,  be- 
low, the  relation  of  these  items  is  shown  graphically, 
and  while  the  figures  are  taken  arbitrarily,  they  are 
suggestive  of  the  relative  proportions  found  in  gen- 
eral machine  production. 

The  items  which  should  be  included  in  the  total  cost 


DIRECT 

LABOR 

$50 


MATERIAL 
$25 


INDIRECT 

EXPENSE 

$50 


PRIME 

COST 

$75 


GENERAL 

EXPENSE 

$25 


FACTORY 
COST 
$125 


PROFIT 
$25 


TOTAL 
COST 
$150 


SELLING 

PRICE 

$175 


Figure  4.     Elements  of  Manufactuhixo  Cost 


are  necessarily  fixed  by  the  nature  of  the  product,  the 
processes  of  production,  the  efficiency  with  which  the 
works  are  operated,  and  the  cost  of  marketing  the 
product.  Profit,  on  the  other  hand,  is  somewhat  arbi- 
trarily fixed,  but  is  closely  connected  with  the  volume 
of  business  transacted,  a  feature  that  is  often  lost  sight 
of.     Suppose,  for  instance,  that  the  total  cost  of  the 


34  COST   FINDING 

product  for  one  year  is  just  equal  to  the  amount  for 
which  the  business  is  capitalized,  and  on  which  it  is 
desired  to  pay,  say,  six  per  cent  profit.  Obviously,  if 
the  total  cost  of  the  product  is  increased  by  six  per 
cent  in  order  to  fix  the  selling  price,  this  object  will  be 
accomplished.  On  the  other  hand,  if  the  total  cost  for 
the  year  is  small  compared  with  the  capitalization,  the 
percentage  to  be  added  must  be  increased  proportion- 
ately; while  if  this  total  is  great  compared  with  the 
capitalization  it  can  be  reduced  in  like  ratio.  The 
value  of  the  annual  output  per  dollar  of  average  in- 
ventory is,  therefore,  a  very  important  matter.  It  is 
not  sufficient  that  the  material  and  labor  value  of  all 
product  be  low.  The  volume  of  the  output  must  be 
sufficiently  great  so  that  the  profit  which  must  be 
added  will  not  bring  the  selling  price  above  what  the 
market  will  stand. 

10.  Methods  of  adding  profit. — The  method  of  add- 
ing profit  to  the  total  cost  as  a  percentage  on  that 
amount  should  be  carefully  noted  where  it  is  desired  to 
use  the  selling  price,  instead  of  the  total  cost,  as  a 
measure  of  the  profit.  Suppose,  for  instance,  that  the 
total  cost  is  $100  and  it  is  desired  to  make  20  per 
cent  on  the  sales  price  in  order  to  realize  the  proper 
returns  on  the  capital  invested.  If  20  per  cent  of 
the  total  cost  is  added  to  the  total  cost  the  selling 
price  will  be  $120  and  the  profit  will  be  $20,  which  is 
not  20  per  cent  of  the  selling  price.  If,  however, 
25  per  cent  be  added  to  the  total  cost,  the  selling 
cost  will  be  100  +  (.25  X  100)  =  $125.    The  profit 


PROBLEMS  OF  COST  FINDING  35 

will  be  $25,  which  is  20  per  cent  of  the  sales  price,  and 
the  profit  will  be  correct  in  its  relation  to  the  desired 
returns  on  the  investment.  Operations  of  this  kind, 
involving  percentage,  should  be  carefully  considered, 
for  they  are  a  fruitful  source  of  error  and  loss.  Obvi- 
ously, these  calculations  are  simpler  and  safer  when 
the  total  cost  is  used  as  a  basis  of  computation. 

In  general,  if  s  be  the  sales  price,  c  the  total  cost, 
and  X  the  percentage  on  the  sales  price  that  it  is  de- 
sired to  obtain, 

then  s  —  c  =  X  s 
whence  s  —  x  s  =  c 

n 

and  s  =■ 


1  — X 


which  may  be  used  for  computing  the  sales  price  when 
the  total  cost  and  the  percentage  are  known. 

11.  Applicability  of  cost- finding  principles. — The 
preceding  chapters  have  discussed  the  general  prob- 
lems of  cost-finding,  and  it  has  been  noted  that  these 
problems  are  common  to  practically  all  industries. 
They  appear  in  farming,  in  commercial  undertakings 
and  in  manufacturing  industries.  The  most  diffi- 
cult cost-finding  problems  are  to  be  found  in  machine- 
building  establishments  because  of  the  variety  of  prod- 
ucts and  also  of  operations  that  are  inherent  in  such 
work.  For  this  reason  a  large  part  of  the  develop- 
ment of  cost-finding  methods  has  been  in  connection 
with  machine  shop  operations,  and  the  discussion  which 


36  COST  FINDING 

follows  is  illustrated  by  many  examples  taken  from 
this  field.  It  should  be  remembered,  however,  that 
the  principles  that  will  be  established  are  applicable, 
with  proper  modifications,  to  practically  all  industry, 
and  a  later  chapter  is  devoted  to  a  brief  discussion  of 
the  application  of  these  principles  to  typical  enter- 
prises. 

REVIEW 

What  are  the  elements  of  prime  cost?  of  factory  cost?  of  total 
cost?  of  selling  price?  Prepare  a  diagram  expressing  the  rela- 
tion between  the  factors  of  sellings  price,  and  compare  your  result 
with  the  diagram  in  the  text. 

How  would  you  allocate  the  following  items  of  expense  in  a 
silk  mill:  raw  silk  purchases;  dyeing;  coal;  commissions  to  sales- 
men; heat  and  light;  weavers'  wages;  purchases  of  lubricating 
oil ;  superintendent's  salary ;  general  office  salaries  ? 

How  would  you  work  out  a  practical  illustration  of  profits  fig- 
ured on  both  cost  and  selling  price?  Which,  in  your  judgment, 
is  the  more  accurate  method  ? 

Why  are  the  terms  "direct"  and  "indirect"  preferable  to  "pro- 
ductive" and  "nonproductive"? 


CHAPTER  IV 

IDENTIFICATION  OF  COSTS 

1.  Classification  of  accounts. — From  the  foregoing 
it  is  obvious  that  cost  finding  is  concerned  with  two 
kinds  of  accounts.  Those  that  have  to  do  with  the 
actual  production  are  constantly  changing,  a  new  ac- 
count being  opened  with  every  new  undertaking  and 
closed  with  its  completion.  On  the  other  hand,  the 
accounts  that  have  to  do  with  repairs  on  buildings, 
maintenance  and  repairs  of  equipment  and  similar 
matters  are  permanent  in  their  character,  continuing 
as  open  accounts  so  long  as  the  enterprise  lasts.  The 
same  is  true  of  labor  expense  and  material  expense 
which  cannot  be  allocated  to  any  particular  piece  of 
work.  They  are  expenses  which  flow  constantly, 
tho  varying  in  volume. 

The  first  step,  therefore,  in  establishing  a  cost  sys- 
tem is  to  make  a  careful  classification  of  these  ac- 
counts. This  classification  will,  necessarily,  conform 
in  its  general  outlines  to  the  manner  in  which  it  is  de- 
sired to  have  all  transactions  appear  in  summarized 
form  in  the  general  accounts,  and  also  to  the  character 
of  the  statistical  information  which  it  is  desired  to  col- 

/      87 


88  COST  FINDING 

lect.  The  classification  ^  will  also  necessarily  vary  in 
character  and  detail,  according  to  the  size  of  the  en- 
terprise and  the  character  and  variety  of  its  product. 
The  classification  for  a  mercantile  establishment  will 
not  be  quite  the  same  as  that  for  a  factory  manu- 
facturing machinery.  The  following  is  a  typical 
classification  of  the  general  ledger  accounts  as  found 
in  enterprises  of  the  latter  class,  with  a  few  of  the 
characteristic  subheadings  to  show  the  kinds  of 
charges  belonging  under  each  heading.  A  more  com- 
prehensive list  is  used  by  large  manufacturing  enter- 
prises; one  large  electrical  manufacturing  establish- 
ment has  over  two  hundred  and  fifty  of  these  accounts. 
The  justification  of  this  large  number  lies  in  the  fact 
that  what  may  be  a  small  item  in  a  small  plant  may 
amount  to  many  thousands  of  dollars  in  a  large  one, 
and  the  possibilities  of  saving  more  than  offset  the  cost 
of  segregating  the  accounts.  This  is  especially  true 
of  the  expense  accounts.  The  monthly  statement, 
Figure  3,  is,  of  course,  a  summarized  statement  of 
these  accounts,  arranged  so  as  to  show  the  totals  of 
the  several  classes  with  only  such  detail  as  appears  to 
be  indispensable. 

1  For  examples  of  such  classifications  see  "Factory  Organization  and 
Costs",  by  J.  Lee  Nicholson,  p.  203,  and  also  "The  Science  of  Account- 
ing", by  H.  C.  BenUey,  p.  85. 


IDENTIFICATION    OF    COSTS 


39 


LEDGER  ACCOUNTS  OF  A  MANUFACTURING 
ESTABLISHMENT 


ASSETS 


Fixed 
Land 
Buildings 

Machinery  and  equipment 
Office  equipment 
Patent  rights 
Development  expenses 
Organization  expenses 


Current 
Cash 

Notes  receivable 
Accounts  receivable 
Treasury  stock 
Consignments  (outward) 
Finished  product 
Goods  in  process 
Unworked  material 
Factory  supplies 


Deferred  charges 
Interest  prepaid 


Miscellaneous 


Advertising  prepaid 
Securities  owned 


Fixed 

Mortgages  payable 
Bonds 

Current 
Notes  payable 
Accounts  payable 
Accrued  interest 
Accrued  taxes 


LIABILITIES 

Reserves 
Doubtful  accounts 
Depreciation 

Net  Worth 
Capital  stock,  common 
Capital  stock,  preferred 
Surplus 
Profit  and  loss 


REVENUE  ACCOUNTS 

Sales  of  product  Miscellaneous  income 

Sales  of  by-product 


40  COST  FINDING 

EXPENSE  ACCOUNTS 

Manufacturing  Expenses 

Direct  material  Depreciation 

Direct  labor  Repairs 

Indirect  labor  Insurance 

Factory  clerical  wages  Taxes 

Factory  supplies  Etc.,  etc.,  etc. 

Sellin*?  Expenses  Administrative  Expenses 

Salesmen's  salaries  Officers'  salaries 

Traveling  expenses  Officers'  expenses 

Agents'  commissions  Directors'  fees 

Advertising  Clerical  wages 

Postage  (used  in  selling)  Office  supplies 

Freight  Office  rent 

Cartage  Postage 

Incidentals  Legal  expenses 

2.  Formation  of  subsidiary  ledgers. — It  is  oHvious 
that  the  ledger  accounts  or  controlling  accounts,  listed 
above,  are  necessarily  fed  from  many  sources.  Thus 
if  a  piece  of  land  or  a  new  machine  is  purchased  the 
transaction  does  not  pass  thru  the  manufacturing  or- 
ganization but  is  conducted  thru  the  manager  or 
superintendent  directly  with  the  real  estate  agent  or 
the  machine  builder.  The  purchase  price  is  added  to 
the  proper  account  under  permanent  assets,  and  the 
cash  account,  if  it  be  a  cash  transaction,  is  lessened  by 
the  corresponding  amount.  If,  however,  the  ma- 
chine is  built  in  the  shop,  as  is  frequently  the  case, -a 
quite  different  procedure  is  adopted,  and  care  must  be 
exercised  that  the  correct  cost  of  manufacture  is  ob- 
tained by  taking  account  of  all  direct  and  indirect  ma- 


IDENTIFICATION    OF    COSTS  41 

terial  and  labor  expended  in  its  construction.  If 
proper  sales  prices  are  to  be  fixed  for  goods  manu- 
factured for  the  market,  the  cost  of  every  article 
manufactured  must  be  ascertained,  and  if  the  general 
accounts  are  to  be  balanced  frequently  the  value  of  all 
material — finished,  in  process  and  in  the  raw  state — 
must  also  be  evaluated  frequently. 

If  the  enterprise  is  small  all  of  these  requirements 
can  be  met  by  accounts  in  a  single  general  ledger, 
the  detail  items  under  each  account  being  consoli- 
dated to  permit  such  treatment.  But  as  any  estab- 
lishment grows  it  becomes  increasingly  necessary  to 
go  into  greater  and  greater  detail,  and  subsidiary 
ledgers  are  opened  to  handle  this  detail,  the  sum- 
marized statements  of  which  may  be  carried  to  the 
general  ledger.  Thus  it  is  often  desirable,  as  ex- 
plained in  the  Modern  Business  Text  on  "Account- 
ing Principles,"  to  open  one  ledger  for  accounts  re- 
ceivable and  another  for  accounts  payable.  The  cash 
transactions  are  often  kept  in  a  separate  cash  book, 
and  a  separate  ledger  may  be  necessary  to  keep 
proper  account  of  the  machinery  and  equipment.  The 
number  and  character  of  these  auxiliary  ledgers  will 
depend  entirely  on  the  size  of  the  business  and  the 
character  of  the  output. 

3.  Separate  cost  records. — When,  therefore,  the  de- 
tails of  the  cost  of  the  product  become  too  voluminous 
for  the  general  books  some  form  of  independent  ac- 
count must  be  opened  for  each  individual  job  or  order. 
This  series  of  accounts  may  be  kept  by  means  of  a 


42  COST  FINDING 

card-index  system  or  they  may  be  kept  in  a  bound 
volume,  but  in  either  case  such  a  set  of  accounts  is 
usually  called  a  cost  ledger.  Just  when  it  becomes 
necessary  to  open  such  a  ledger  cannot  be  definitely 
fixed,  but  depends  again  on  the  circumstances  of  the 
business.  There  is  a  general  tendency,  however,  to 
separate  the  cost-finding  system  from  the  general 
books,  even  in  certain  kinds  of  small  plants,  for  rea- 
sons that  will  presently  appear.  The  extent  to  which 
this  is  necessary  is  also  much  affected  by  the  character 
of  the  manufacturing  processes  and  the  consequent 
organizations  of  the  enterprise.  Manufacturing 
plants  may  be  divided,  broadly  speaking,  into  two 
kinds,  namely: 

(a)  Continuous-process  industries. 

(b)  Intermittent,  or  interrupted,  process  indus- 
tries. 

4.  Continuous- process  industries. — In  a  continu- 
ous-process industry  of  the  extreme  type  the  mate- 
rials are  passed  in  a  steady  stream  thru  a  process  or 
sequence  of  processes.  The  raw  material  goes  in  at 
the  receiving  end  of  the  plant,  is  worked  continuously, 
and  appears  as  finished  product  at  the  shipping  end 
of  the  plant.  Thus  a  cement  plant  is  supplied  with 
a  constant  stream  of  the  necessary  ingredients,  passes 
them  all  thru  the  same  processes  and  produces  a  uni- 
form product,  so  far  as  appearances,  at  least,  are 
concerned.  Ore-reducing  plants,  oil  refineries,  salt 
works  and  sawmills  are  other  examples  of  this  kind 
of  industry. 


IDENTIFICATION  OF  COSTS  48 

Such  an  industry  may  be  either  analytical  or  syn- 
thetical. That  is,  it  may  take  some  natural  product 
and  separate  it  into  component  parts,  as  in  the  case  of 
ore  reducing  or  of  industries  turning  out  products 
made  from  salt;  or  it  may  take  raw  materials  and 
build  them  up  synthetically  into  other  products,  as  in 
the  case  of  a  paint  works.  Usually  such  factories 
handle  only  a  few  materials  and  these  in  very  large 
quantities. 

In  the  extreme  case  where  the  processes  involved 
are  not  numerous,  and  the  quantities  handled  are  vast 
and  of  few  kinds,  the  cost  finding  is  very  simple.  All 
that  is  needed  is  the  cost  per  unit  (yard,  pound,  or 
ton,  as  the  case  may  be)  and  this  involves  only  a  rec- 
ord of  the  output  for  the  period  considered  and  a 
record  of  the  labor,  material  and  expenses  incurred 
for  the  same  period.  If  the  value  of  the  material  in 
process  is  not  great  the  unit  .cost  can  be  ascertained 
accurately  enough  by  dividing  the  summarized  labor, 
material  and  expense  by  the  output  for  the  period 
selected.  If,  however,  the  value  of  the  material  in 
process  is  great,  allowance  must  often  be  made  for 
this  value,  especially  if  the  rate  of  production  varies. 
Clearly  the  cost  finding,  even  in  such  cases,  need  not 
extend  beyond  the  general  books,  and  in  simple  cases 
it  is  not  necessary  to  keep  the  expenses  of  production 
in  any  great  detail,  since  these  expenses  are  neces* 
sarily  distributed  uniformly  over  the  product. 

There  are  often  administrative  reasons,  however, 
for  keeping  detailed  costs  even  in  these  simple  cases. 


44.  COST  FINDING 

Thus,  in  some  continuous  industries  it  is  desirable  to 
know  the  cost  of  production  by  departments  or  proc- 
esses ;  or  the  plant  may  be  producing  several  articles 
continuously,  each  article  passing  thru  the  same  de- 
partments. In  such  cases  simple  division  of  the  sum- 
marized cost,  as  already  indicated,  may  not  suffice, 
and  cost-finding  methods  apart  from  the  general 
books  must  be  resorted  to. 

5.  Intermittent-process  industries. — At  the  other 
extreme  are  industries  that  manufacture  a  variety  of 
products  and  a  comparatively  small  number  of  each 
variety.  A  plant  for  the  building  and  repairing  of 
ships  is  a  good  example  of  this  extreme  type.  Here 
duplication  of  an  order  is  not  frequent,  and  the  great- 
est diversity  of  product  is  met  with,  as  regards  both 
character  and  size.  Obviously,  only  cost-finding 
methods  that  take  account  of  the  labor,  material  and 
expense  that  justly  belongs  to  each  job  are  adequate 
in  such  cases.  The  degree  of  detail  into  which  it  is 
necessary  to  carry  the  cost-finding  methods  will,  of 
course,  vary  gTcatly  with  the  character  of  the  work, 
but,  evidently,  no  simple  averaging  methods,  such  as 
have  been  discussed,  will  give  even  approximate  costs 
in  cases  like  this.  The  various  items  of  shop  expense 
are  chargeable  in  varying  degree  to  the  many  articles 
made,  and,  while  it  is  not  difficult  to  allocate  the 
material  and  labor  actually  used  on  any  contract,  the 
distribution  of  the  indirect  expense  presents  a  diffi- 
cult problem. 

6.  Combined  intermittent  and  continuous  factories. 


IDENTIFICATION  OF  COSTS  4f5 

— Between  these  two  extremes  are  found  many  en- 
terprises that  employ  both  intermittent  and  continu- 
ous processes  to  a  greater  or  less  degree.  Thus  a 
large  electrical-machinery  factory  may  build  large- 
sized  generators,  motors  or  transformers,  to  order 
only,  and  seldom  in  lots  of  more  than  three  or  four. 
On  the  other  hand,  it  may  also  build  a  large  number 
of  small  motors  or  transformers,  these  articles  not 
being  in  continuous  production,  but  passing  thru  in 
large  lots  as  needed.  Large  numbers  of  finished 
parts  may  be  made  at  any  one  time  and  placed  in 
the  storeroom  to  be  assembled  whenever  desired. 
Again,  certain  processes  such  as  annealing  and  dip- 
ping in  insulation  may  be  in  constant  operation,  like 
a  continuous  process,  tho  all  the  sheet  steel  passing 
thru  may  be  handled  and  identified  as  belonging  to 
certain  specified  lots  and  intended  for  specific  jobs. 
The  porcelain  works  of  such  a  factory,  if  it  were 
making  porcelain  parts  of  approximately  the  same 
size,  might  very  well  be  treated  as  a  continuous  in- 
dustry and  the  cost  of  its  output  might  be  computed 
by  the  unit  plan,  as  in  the  extreme  continuous  indus- 
tries discussed  above.  The  same  procedure  might 
be  followed  in  the  foundry,  if  the  manufacturing  con- 
ditions were  analogous  and  no  great  variation  in  the 
size  and  character  of  the  product  existed. 

Obviously  the  conditions  in  such  a  factory  are  com- 
plex, and  the  cost  system  that  will  be  adequate  for 
such  a  place  needs  careful  consideration  and  may  in- 
clude characteristics  of  more  than  one  method  of  cost 


46  COST  FINDING 

finding.  Clearly,  also,  no  single  method  of  cost  find- 
ing is  applicable  to  all  kinds  of  industry,  and  many 
practical  modifications  must  often  be  made  in  cost- 
keeping  theory  in  order  to  obtain  a  workable  system. 
In  most  cases  exact  results  are  not  obtainable,  be- 
cause of  such  complexities.  There  are,  however,  cer- 
tain fundamental  conceptions  that  are  helpful  in  all 
cases. 

7.  Blanks  and'  forms  for  cost  finding. — It  is  ob- 
vious also  that,  where  a  factory  is  highly  department- 
ized,  as  in  Figure  2  (page  21),  special  means  must 
be  employed  to  coordinate  the  work  of  the  several 
departments  and  to  insure  that  correct  information 
shall  go  to  the  right  persons  and  to  those  persons  only. 
Such  information  cannot  be  carried  orally,  but  must 
be  transmitted  by  means  of  systematized  blanks  and 
printed  forms.  Furthermore,  the  amount  and  char- 
acter of  the  "system"  used  will  vary  widely  with  the 
character  of  the  industry,  the  size  of  the  plant  and 
its  particular  form  of  organization.  The  card  or 
form  that  will  be  excellent  for  a  particular  purpose  in 
one  factory  will  be  useless  for  the  same  purpose  else- 
where. No  effort  is  made  here,  therefore,  to  illus- 
trate such  forms  or  blanks  except  as  it  is  necessary  to 
illustrate  general  principles.  If  the  purpose  of  the 
blank  can  be  clearly  determined  the  exact  form  of 
the  ruling  and  of  the  printed  content  is  a  matter  of 
clerical  work  only;  tho,  of  course,  much  valuable 
information  and  assistance  can  be  obtained  from  the 


IDENTIFICATION  OF  COSTS  47 

collections  of  such  documents  that  are  found  in  spe- 
cialized books  on  cost  finding  and  on  accounting. 

Even  where  the  cost-finding  system  is  elementaiy, 
and  does  not  extend  beyond  the  general  books,  it  is 
important  that  the  blanks  and  forms  used  in  admin- 
istration be  made  with  the  cost  sj^stein  in  mind. 
Much  valuable  time  is  often  wasted  in  copying  and  re- 
copying  instructions  or  records  that  should  appear  in 
the  required  form  as  a  natural  result  of  the  system. 
When,  however,  the  detail  costs  required  are  such 
as  to  warrant  the  employment  of  a  cost  keeper,  and 
the  opening  of  special  ledgers,  such  as  the  stores 
ledger  and  the  cost  ledger,  the  forms  and  blanks  used 
must  cover  thoroly  the  system  introduced.  The  man- 
ufacturing superintendent  is  concerned  with  placing 
proper  orders  for  producing  machines.  The  cost 
keeper  is  concerned  with  the  detail  in  which  these  or- 
ders are  given,  since  on  the  detail  in  which  the  order  is 
given  must  rest  the  detail  in  which  his  cost  will  be 
recorded.  The  set  of  forms,  therefore,  should  serve 
both  purposes,  namely,  that  of  carrying  the  correct 
inforr.:ation  as  to  the  method  of  doing  the  work,  and 
at  the  same  time  that  of  segregating  operations  in  such 
a  manner  as  to  allow  the  intelligent  recording  of  costs. 
No  one  thing  is  so  fatal  to  system  of  any  kind  as 
complexity.  Every  effort  should  be  made,  therefore, 
to  keep  the  number  of  the  blanks  down  to  a  mini- 
mum consistent  with  the  absolute  requirements  of  the 
situation. 

XII— 5 


48  COST  FINDING 

8.  Two  classes  of  blank  forms. — A  large  manu- 
facturing enterprise  may  employ  a  great  number  of 
these  blanks  and  forms,  and  to  the  uninitiated  this 
vast  array  is  often  very  confusing.  There  are,  how- 
ever, only  two  general  types  of  such  documents,  and 
it  will  assist  materially  in  an  understanding  of  com- 
plex systems  if  these  blanks  are  classified  into: 

(a)  Orders,  or  instructions  as  to  how  work  is  to  be 
done. 

(b)  Returns,  or  records  of  how  work  has  been  per- 
formed. 

Orders  include  all  instructions  or  advice  emanating 
from  all  departments  and  officials  that  are  charged 
with  directing  the  work.  Thus,  the  drawings  and 
specifications  issuing  from  the  drafting  room,  and 
the  information  regarding  shipping  dates  and  des- 
tination of  product,  may  be  regarded  as  orders,  just 
as  much  as  the  specific  orders  that  must  be  given  to  a 
mechanic  regarding  a  particular  piece  of  work.  It 
may  be  further  helpful  if  these  orders  are  considered 
as  moving  downward  in  Figure  2  (page  21)  over 
predetermined  paths,  each  one  carrying  its  informa- 
tion accurately  to  the  right  parties  and  to  them  only. 
In  large  organizations  it  is  now  common  to  make  such 
a  chart  as  Figure  2  and  lay  out  such  paths;  also  to 
specify  the  character  of  the  orders  that  are  to  move 
along  each  one.  Figure  6  (page  64)  illustrates  a 
production  order  issued  by  the  order  clerk  (Figure 
2),  instructing  the  foreman  of  some  department,  per- 
haps, to  proceed  with  some  operation.     The  produc- 


IDENTIFICATION  OF  COSTS  49 

tion  order  carries  the  number,  letter  or  other  char- 
acteristic which  identifies  the  work,  whether  it  be  a 
lot  of  machines,  a  single  machine,  or  a  part  of  a  ma- 
chine, and,  obviouslj^,  the  detail  in  which  it  is  made 
out  will  govern  the  detail  in  which  the  returns  can 
be  made. 

Returns  include  all  statements  that  give  the  re- 
sults of  operations  or  the  records  of  material  used, 
whether  for  direct  product  or  for  supplies;  also  rec- 
ords of  time  expended  and  wages  paid.  Returns 
may  also  include  all  sunmiarized  reports  and  similar 
documents.  These  returns  have  their  origin  where 
the  work  is  being  done  and  where  material  is  being 
drawn  from  stores  and  worked  into  finished  product. 
It  may  assist  in  the  visualizing  of  these  matters  if  re- 
turns are  considered  as  moving  upward  from  the 
points  where  the  actual  operations  are  performed, 
being  constantly  consolidated  into  briefer  statements 
till  they  are  merged  into  the  general  books  and  gen- 
eral consolidated  reports.  Figure  8  (page  83) 
shows  a  typical  work  card  on  which  may  be  recorded 
the  amount  of  time  expended  on  any  given  operation 
and  the  rate  of  pay  which  the  operator  is  to  receive. 
This  card  bears  the  order  number  or  letter  which  has 
been  assigned  to  this  particular  operation  and  piece 
of  work  and  is,  therefore,  a  basic  factor  in  cost  find- 
ing, whether  it  refers  to  a  lot  of  machines  or  a  minute 
detail  of  any  one  of  them. 

9.  Necessity  of  identifying  work. — If  costs  are  to 
be  obtained,  whether  of  large  lots  of  machines,  a 


50  COST  FINDING 

single  machine,  or  of  each  part  of  a  machine,  some 
means  must  be  provided  for  identifying  the  lot  or 
machine  or  part.  No  two  machines  or  parts  may  bear 
the  same  distinguishing  mark,  and  if  many  thousands 
of  pieces  are  passing  thru  the  works  at  any  one  time 
it  is  obvious  that  some  system  must  be  adopted  that 
will  be  capable  of  great  expansion  without  danger 
of  repetition.  Furthermore,  constant  reference  must 
be  made  to  the  several  departments  of  the  factory. 
To  write  the  names  of  these  departments  out  in  full 
would  take  too  long  and  would  be  a  waste  of  labor. 
It  is  customary,  therefore,  to  refer  to  departments  by 
number  or  symbol.  Again,  in  making  up  shop  or- 
ders it  is  necessary  to  specify  the  operations,  or  se- 
quence of  operations,  on  each  piece.  This  also  may 
involve  reference  to  tools  and  equipment.  In  a  large 
works  the  tools  and  equipment  may  be  many  and 
diverse,  including  many  special  jigs,  fixtures  and 
similar  apparatus;  the  number  and  character  of  the 
operations  performed  may  also  be  many  and  varied. 
Furthermore,  the  materials  used  may  be  of  many 
kinds  and,  since  constant  reference  must  be  made  to 
them,  they  also  should  be  the  subject  of  abbreviated 
nomenclature.  With  the  constant  and  rapid  growth 
of  the  methods  of  planning  all  operations  in  advance, 
as  advocated  by  modern  production  engineers,  these 
last  items  assume  great  importance  in  factory  admin- 
istration. The  more  accurately  all  machines,  opera- 
tions and  materials  are  identified,  the  more  accurately 
and  easily  can  productive  costs  be  allocated.     The 


IDENTIFICATION  OF  COSTS  51 

laying  out  of  a  good  system  of  identification  is,  there- 
fore, a  necessity,  whether  viewed  from  the  standpoint 
of  operating  administration  or  of  cost  finding. 

10.  Mnemonic  symbols. — There  are  several  identi- 
fication methods  now  in  use.  In  many  places  the  de- 
partments are  known  and  referred  to  by  simple  letters, 
such  as  A,  B,  c,  D.  Where  only  a  few  departments 
are  to  be  handled  this  method  is  adequate.  If  the 
departments  are  numerous,  and  it  is  desired  to  apply 
numerical  identification  to  other  lines,  a  system  of 
mnemonic  sjmbols  is  often  employed.  Thus  the  let- 
ters T  A  might  be  used  to  indicate  the  transformer- 
assembly  department,  the  letters  s  m  might  indicate 
the  screw  machine  department,  and  so  on.  Similar 
abbreviations  are  commonly  employed  to  indicate  the 
materials  used.  Thus  c  i  indicates  that  the  part  is 
cast  iron ;  m  s,  that  it  is  of  machine  steel. 

The  problem  of  identifying  operations  is  a  little 
more  complex.  If  only  a  few  operations  are  in  use, 
mnemonic  symbols  are  adequate  and  are  often  used. 
Thus  TX  may  signify  turn,  bo  may  mean  bore,  gr 
may  signify  grind,  and  so  on,  each  enterprise  com- 
piling symbols  suited  to  its  own  operations.  Some- 
times the  use  of  symbols  is  obviated  by  printing  all 
the  operations  on  the  side  of  the  cards  which  give 
instructions  or  record  returns,  as  illustrated  on  the 
work  card.  Figure  9  (page  85),  in  such  a  manner 
that  the  facts  may  be  indicated  by  a  check  mark. 
This  method  also  saves  writing,  but  its  use  is  limited 
to  industries  involving  standard  operations. 


6«  COST  FINDING 

The  problem  of  identifying  departments  or  opera- 
tions is,  in  general,  an  easy  one  compared  to  that  of 
identifying  the  products  and  parts  of  products,  par- 
ticularly in  large  plants  doing  a  wide  range  of  work. 
In  factories  which  make  large  products,  such  as  steam 
engines,  and  where  a  comparatively  small  number  of 
machines  are  being  produced  at  any  one  time,  mne- 
monic methods  are  sometimes  used.  Thus,  in  some 
shops  of  this  character  the  term  "Osp"  might  be  used 
to  designate  all  drawings  for  an  engine  built  for  a 
certain  hospital,  and  each  drawing  might  bear  this 
symbol  followed  by  a  serial  number  which  would  lo- 
cate the  drawing  in  the  series  belonging  to  that  engine, 
the  drawing  serving  as  a  basis  for  production  orders 
and  cost  charges. 

11.  Drawing  numbers. — In  large  factories  with  a 
variety  of  products,  however,  these  simple  methods 
of  identifying  machines  and  machine  parts  fail  com- 
pletely, and  identification  must  usually  rest  upon  a 
carefully  arranged  system  of  drawing  numbers,  so 
called.  In  a  very  large  works  where  many  thousands 
of  drawings  are  made  yearly,  this  necessitates  a  care- 
ful consideration  of  the  entire  manufacturing  prob- 
lem, and  perhaps  the  separation  of  the  product  into 
distinct  classes.  Here  mnemonic  or  in  fact  any  sys- 
tem of  symbols  based  entirely  on  letters  is  usually  in- 
adequate or  too  cumbersome,  and  numbers,  or  com- 
binations of  numbers  and  letters,  are  used.  Thus  the 
symbol  k  24,689  might,  in  such  a  system,  identify  the 
drawing  of  a  steam-engine  cylinder,  the  letter  indi- 


IDENTIFICATION  OF  COSTS  5b 

eating  the  class  of  product,  and  the  numerical  part 
indicating  its  place  in  the  series.  Sometimes,  again, 
all  drawings  are  numbered  serially,  and  an  index  is 
kept  which  shows  the  serial  numbers  of  the  draw- 
ings used  for  each  machine.  The  drawing  of  any 
part  may  be  found  by  looking  at  the  index  of  the 
drawings  that  were  used  in  making  the  machine  and 
finding  the  serial  number  of  the  particular  drawing 
on  which  the  part  would  be  found.  Sometimes,  too, 
a  numbering  system  based  on  the  Dewey  decimal 
system  of  classification  is  used,  certain  classes  of  num- 
bers being  set  aside  for  certain  blocks  of  machines  or 
product.  Thus,  all  numbers  beginning  with  .012 
might  indicate  transformers  and  all  numbers  begin- 
ning with  .013  might  indicate  oil  switches.  In  prac- 
tice the  decimal  point  is  omitted  for  convenience,  and 
the  integers  in  the  number  are  always  preceded  by  a 
cipher.  The  Dewey  system  has  the  advantage  of  un- 
limited expansibility  without  repetition;  it  can  be 
made  as  comprehensive  as  may  be  desired,  and  hence 
is  well  suited  for  large  works.  The  system  that  is 
best  for  one  shop  may  not  apply  to  others,  however, 
and  each  case  requires  special  study  in  order  that 
the  system  may  be  made  comprehensive  without  being 
cumbersome. 

Whatever  the  general  method  of  classifying  the 
drawings,  each  drawing  may  carry  more  than  one 
part,  tho  in  some  systems  only  one  part  is  put  upon 
each  drawing.  Where  more  than  one  part  appears 
on  a  sheet  each  may  be  identified  by  a  part  letter. 


54  COST  FINDING 

Thus,  in  such  a  system,  k  24,689-a  might  signify  part 
A  on  drawing  24,689  of  the  class  of  product  indicated 
by  K.  This  identifies  the  part  beyond  question,  mak- 
ing it  possible  to  charge  with  accuracy  all  labor  and 
material  that  enters  into  its  production. 

12.  Drawing  lists. — In  most  well-organized  shops 
using  methods  of  this  kind,  the  engineering  depart- 
ment originates  the  directions  governing  the  construc- 
tive features  of  the  work,  and  turns  over  to  the  con- 
struction department  full  drawings  and  specifications 
in  such  detail  that  every  part  may  be  identified,  not 
only  during  actual  construction,  but  for  all  time,  so 
long  as  the  drawings  are  existent.  In  highly  devel- 
oped systems  a  drawing  list.  Figure  5,  opposite,  ac- 
companies the  drawings  and  specifications.  Such  a 
list  constitutes  a  complete  inventory  of  the  parts  that 
are  to  be  made,  and  is  an  index  to  the  drawings  and 
lists,  where  the  parts  may  be  found  in  detail.  Thus 
in  Figure  5  the  number  of  the  drawing  and  that  of 
the  part  or  piece,  are  listed,  the  material  of  which  the 
part  is  to  be  made  is  noted,  and  the  number  of  the 
parts  required  is  given.  Reference  is  also  made  to 
the  engineering  and  other  specifications  that  accom- 
pany the  drawing.  Figure  5  illustrates  a  system 
which  uses  the  Dewey  decimal  method  for  numbering 
drawings,  but  which  uses  a  combination  of  letters  and 
integers  for  other  documents,  such  as  tabulated  data 
and  engineering  specifications. 

It  will  be  noted  that  such  a  method  allows  the  free 
and  convenient  use  of  any  one  part  in  the  construction 


DRAWING  LIST                         NO.  Xf. 

MACHINE 

TYPE 

CUSS 

VOLTS 

DATE 

'S^Ji^MUL/cd/n' 

7n.(R.(P. 

/0-H-00-6S0 

X2.00 

H--//-/9ZI 

NAME  OF  PART 

DRAWING 
NO. 

NO. 

P»RT 

NO. 

NO.   OF 
PABTS 

TEH1»L 

DATC 

AODEO 

0<TE 
CMANCtO 

MACHINE  COMPLETE 

OIX 

■  ■           OUTLINE 

OIXI 

ARMATURE  COMPLETE 

0/0-2 

11             DIAGRAM 

0  1X3 

«             FRAME 

0  IXH- 

a. 

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CI 

S-X^-it 

II             PUNCHING 

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TtoZS 

BASE 

OOZh- 

a. 

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CI 

BEARING 

00  3S 

r2> 

X 

CI 

BRUSH 

BRUSH  HOLDER 

1,          STAND 

1.          STAND  SUPPORT 

II          STAND  BRACKET 

1.          STUDS 

,1          YOKE 

CABLE 

II        FOR  HELD 

II        COUPLING 

COLLECTOR 

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CONNECTION  BOARD 

CTcdUjL 

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COUPLING 

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LIST  OF  CASTINGS 

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ENGINEERING  NOTICE 

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FlGUBE   5 

55 


!56  COST  FINDING 

of  any  machine,  whether  designed  originally  for  it  or 
not,  since  identification  is  complete.  Thus,  in  Figure 
5  the  armature  and  field  are  taken  from  one  series, 
the  shaft  and  bearings  are  taken  from  other  series, 
and  still  other  parts  were  made  originally  for  other 
classes  or  sizes  of  the  same  type  of  machine. 

The  nomenclature  given  in  Figure  5  has  been  taken 
at  random,  but  it  is  a  probable  combination.  In  well 
standardized  production  such  lists  may  be  printed  in 
outline  and  the  data  filled  in  by  hand.  Thus  in  Fig- 
ure 5  the  data  that  would  be  so  filled  in  are  indicated 
by  script.  It  will  be  evident  that  the  shop  orders 
governing  the  production  of  the  machines,  as  a  whole 
or  in  part,  as  the  case  may  be,  and  the  shop  returns 
recording  the  details  of  such  production,  can  be  made 
out  with  the  assurance  that,  so  far  as  identification  is 
concerned,  the  correct  labor  and  material  charges  will 
be  recorded  against  the  cost  of  the  part  concerned. 

13.  Mnemonic  and  number  systems  compared. — 
The  relative  merits  of  mnemonic  symbols  and  numeri- 
cal identification  should  be  noted.  No  doubt,  in  the 
cases  where  the  number  of  items  is  small  and  where  it 
is  desirable  to  remember  departments  or  operations, 
the  mnemonic  system  is  useful.  For  this  reason  it  is 
often  used  to  identify  departments  and  operations. 
It  is  also  used  to  identify  expense  orders.  Thus  all 
charges  against  buildings  can  be  carried  in  account 
B,  and  all  charges  against  power,  heat  and  light, 
against  account  P.  H.  L.  In  large  factories,  how- 
ever, where  it  is  necessary  to  separate  the  expense  into 


IDENTIFICATION  OF  COSTS  5T 

many  items,  it  becomes  necessary  to  use  numbers. 
Thus  in  making  a  labor  report  the  expense  may  be 
charged  against  numbers,  while  the  direct  labor  is 
charged  against  the  letters  which  identify  the  several 
classes  of  product. 

Obviously,  the  degree  of  detail  needed  in  the  nomen- 
clature of  a  factory  depends  entirely  upon  the  charac- 
ter of  the  enterprise.  In  simple,  continuous  indus- 
tries few  details  are  required  in  the  nomenclature, 
while  in  large,  intermittent  industries  it  may  be  neces- 
sary to  go  to  all  the  detail  which  has  been  described. 
Whatever  system  is  adopted  it  should  identify  each 
part  beyond  a  doubt,  and  it  should  be  capable  of  ex- 
tension as  the  industry  expands.  To  change  the  sys- 
tem of  nomenclature  and  identification  is  always  a 
troublesome  problem  and  one  that  can  often  be 
avoided  by  a  little  foresight. 

It  is  important  to  have  clearly  in  mind  the  prin- 
ciples that  have  been  discussed  in  this  chapter,  since 
upon  them  depend  the  methods  used  in  collecting  the 
material  and  labor  charges,  whether  against  the  job 
as  a  whole  or  against  any  detail.  The  need  of  such 
detailed  methods  of  identification  will  be  clearer  after 
a  discussion  of  the  principal  items  with  which  cost 
keeping  is  concerned,  namely,  materials,  labor,  and 
expense. 

REVIEW 

Under  what  headings  would  the  following  accounts  be  placed: 
Advertising;  office  expenses;  land;  treasury  stock;  taxes;  accrued 
taxes;  factory  supplies;  salesmen's  traveling  expenses;  sales  of 
product  ? 


68  COST  FINDING 

What  are  the  characteristics  of  a  continuous-process  industry? 
of  an  intermittent-process  industry?  of  a  combined  continuous- 
and  intermittent-process  industry? 

For  your  own  information,  classify  the  following  industries  as 
continuous-process  industries  or  intermittent-process  industries: 
a  shoe  factory  making  one  grade  of  men's  shoes;  a  shingle  mill; 
a  chemical  factory ;  a  tannery. 

How  would  you  designate  the  following  expense  accounts  of 
both  a  wholesale  and  a  retail  sales  department  by  mnemonic 
symbols:  salary  of  manager;  clerk's  wages;  traveling  expenses; 
advertising;  rent;  light;  telephone;  miscellaneous? 


CHAPTER  V 

ISSUING    AND    EVALUATING    MATERIAL 

1.  Issuing  materials  in  general. — It  is  a  cardinal 
principle  in  good  cost-finding  systems  that  no  ma- 
terial of  any  kind  should  be  issued  from  the  stores 
without  a  requisition  which  indicates  the  authority  for 
the  transaction  and  the  account  to  which  the  material 
is  to  be  charged.  It  is  true,  of  course,  that  in  small 
shops,  particularly  where  the  material  handled  is  of 
no  value  for  personal  use,  it  will  not  pay  to  employ 
a  storekeeper ;  workmen  may  be  allowed  to  help  them- 
selves from  open  bins  or  racks.  As  previously  noted, 
these  cases  are  rare.  Generally  it  pays  to  have  a  store- 
keeper, whether  detail  costs  are  kept  or  not.  He  will, 
as  a  rule,  save  the  company  more  than  enough  to  pay 
his  wages.  It  is  universal  experience  that  workmen 
when  allowed  to  draw  either  direct  or  indirect  material 
from  the  stores  without  check,  become  careless  and 
wasteful,  not  only  as  to  the  quantity  drawn  out,  but 
also  as  to  its  economical  use.  Loose  storeroom  meth- 
ods are  also  likely  to  lead  to  dishonesty,  pilfering 
and  bad  habits  generally,  on  the  part  of  employes. 
Aside  from  the  actual  saving  made  by  properly  regu- 
lating the  withdrawal  of  material  from  stores,  such 

59 


60  COST  FINDING 

regulations  serve  to  accentuate  constantly  the  value 
of  material,  whether  direct  or  indirect  in  character. 

2.  Requisitions  by  foremen. — The  simplest  way  to 
arrange  for  the  drawing  of  material  on  requisition  is 
to  empower  the  foreman  to  issue  the  required  requisi- 
tion. The  foreman  is  provided  with  an  order  book, 
and  no  material  is  issued  except  on  an  order  describ- 
ing the  material,  its  amount,  and  the  purpose  for 
which  it  is  intended.  This  system  is  simple  and  flexi- 
ble. It  responds  quickly  to  any  emergency,  and  for 
this  reason  it  is  particularly  applicable  in  the  case 
of  small  shops.  There  is  no  delay  in  getting  material 
from  the  stores  to  the  production  floor,  and  in  a  shop 
doing  repair  work  this  is  a  valuable  feature.  In 
many  small  shops,  where  the  work  is  more  or  less  un- 
certain in  character,  the  number  of  men  employed 
is  small,  and  refined  cost-finding  methods  are  not 
necessary,  this  simple  system  will  answer  all  require- 
ments. It  certainly  is  a  vast  improvement  over  the 
loose  methods  so  often  employed  in  small  shops,  where 
every  man  helps  himself  and  where  no  check  whatever 
is  put  upon  wastefulness. 

If,  however,  the  enterprise  is  large  and  each  fore- 
man has  many  men  under  him,  it  is  not  good  policy 
to  fill  up  his  valuable  time  with  clerical  duties.  He 
has  usually  too  many  other  important  functions  to 
perform,^  and  if  pressed  for  time,  as  he  usually  is,  he 

1  Mr.  F.  W.  Taylor's  paper  on  "Shop  Management",  particularly  that 
part  dealing  with  the  many  duties  of  the  average  foreman,  in  the 
"Transactions  of  the  American  Society  of  Mechanical  Engineers",  VoL 
24,  deals  with  this  subject  in  greater  detail. 


ISSUING  AND  EVALUATING  MATERIAL        61 

will  not  do  this  requisitioning  well.  A  busy  foreman 
who  is  expected  to  maintain  a  large  output  from  his 
department  will  not  be  particular  or  accurate  in  mak- 
ing out  bills  of  material  for  marketable  product;  and 
if  he  is  also  obliged  to  write  orders  for  supplies  and 
indirect  material,  he  will  naturally  be  very  inaccurate 
in  regard  to  the  distribution  of  the  cost  of  these  items. 
He  can,  of  course,  be  given  a  clerk  to  help  him  in  this 
work,  and  this  assistance  may  answer  in  certain  kinds 
of  moderate-sized  plants.  From  the  standpoint  of  in- 
telligent cost  finding,  however,  even  this  method  is 
unsatisfactory,  and  it  fails  for  reasons  that  will  follow. 
In  fact,  when  the  situation  warrants  the  employment 
of  clerical  help  of  this  character,  it  is  time  to  discard  a 
simple  system  for  something  more  advanced  and  more 
accurate. 

3.  Planning  production  in  advance. — Brief  men- 
tion was  made  in  Section  5,  Chapter  II,  of  the  grow- 
ing tendency  to  separate  all  planning  functions  from 
those  that  have  to  do  with  production.  This  is  well 
illustrated  in  the  engineering  department,  where  all 
structural  plans  are  made  entirely  aside  from,  and  in 
advance  of,  actual  production.  A  similar  movement 
is  making  rapid  progress  in  the  production  depart- 
ment proper,  looking  to  the  planning  of  all  productive 
processes  in  advance  of  the  actual  productive  opera- 
tions. The  writer  uses  the  term  production  depart- 
ment to  designate  the  entire  productive  organization 
imder  the  superintendent  of  production,  and  not  in 
the  narrow  sense  in  which  it  is  often  employed  to 


62  COST  FINDING 

designate  what  is  really  nothing  more  than  a  plan- 
ning department.  Planning  departments  are  being 
introduced  quite  rapidly,  and  the  growth  of  this  idea 
should  be  studied  by  those  interested  in  cost  finding. 

A  planning  department  aims  to  do  for  the  pro- 
ductive branch  of  the  factory  exactly  what  the  en- 
gineering department  has  accomplished  for  the  scien- 
tific branch.  The  engineering  department  predicts 
what  is  to  be  done;  the  planning  department  aims  to 
predict  how  the  work  is  to  be  done.  The  planning 
department  is,  of  course,  an  integral  part  of  the  pro- 
duction department. 

Obviously,  the  degree  to  which  it  is  possible  to  pre- 
dict methods  of  production  will  depend  on  the  char- 
acter of  the  industry  and  the  amount  of  study  that 
has  been  put  upon  this  phase  of  the  particular  industry 
under  consideration.  In  general,  the  possibilities  of 
predicting  the  results  of  production  are  as  yet  only 
partially  developed,  but  progress  is  being  made  in 
this  direction,  and  it  should  be  carefully  studied  in 
connection  with  cost-finding  systems;  for  the  general 
philosophy  that  underlies  these  movements  holds  true 
also  for  cost  finding  and  is  closely  connected  with  its 
growth.  The  discussion,  for  the  present,  will  be  con- 
fined to  the  problem  of  finding  costs  as  they  accrue, 
but  a  later  section  will  discuss  the  more  advanced  idea 
of  predicting  costs  in  advance  of  construction. 

4.  Specifying  the  material. — It  should  be  noted  in 
this  connection,  however,  that  if  costs  are  to  be  de- 
termined intelligently,  the  methods  of  securing  them 


ISSUING  AND  EVALUATING  MATERIAL       63 

must  be  planned  in  advance.  Just  as  the  designing 
engineer  should  plan  in  advance  all  the  constructive 
features  of  the  product,  and  just  as  the  superintend- 
ent of  production  should  foresee  all  his  productive 
processes,  so  the  cost  keeper  should  know  in  advance 
what  costs  he  needs  to  collect  and  should  lay  his  plans 
to  collect  them  without,  at  the  same  time,  gathering  a 
mass  of  information  he  does  not  want.  One  of  the 
most  common  and  most  drastic  criticisms  that  is  ap- 
plied to  many  cost-finding  systems  is  that  they  waste 
money  in  finding  detail  costs  that  are  not  useful,  while 
neglecting,  perhaps,  cost  data  that  are  extremely  valu- 
able. It  is  for  this  reason,  as  before  noted,  that  a 
good  cost  system  cannot  be  installed  in  the  abstract. 
It  must  be  prepared  with  special  reference  to  the  par- 
ticular business  in  which  it  is  to  be  used. 

In  a  well-organized  modern  factory  of  the  inter- 
mittent type,  therefore,  the  engineering  department 
will  turn  over  to  the  production  department  drawings 
and  specifications  which  show  just  what  is  to  be  done. 
Each  piece  called  for  will  bear  an  identifying  number 
or  symbol,  as  explained  in  Chapter  IV.  In  best 
practice  the  engineering  department  will  also  furnish 
complete  bills  of  material  showing  in  detail  just  what 
direct  material  is  needed  for  each  part.  Detailed 
statements  such  as  these  enable  the  order  clerk,  or 
whoever  is  charged  with  the  duties  of  that  office,  to 
authorize  with  accuracy  the  withdrawal  of  material 
from  the  storeroom,  and  also,  as  will  be  seen,  to 
identify  the  material  with  the  costs  of  fabrication  that 

XII— 6 


64i  COST  FINDING 

belong  to  it.  Where  material  lists  are  not  made  out 
by  the  engineering  department,  bills  of  material  are 
made  out  by  the  order  clerk  (Figure  2,  page  21). 
Obviously,  the  more  accurately  these  material  lists  are 
compiled,  the  more  accurately  can  the  raw  material 
be  drawn  from  the  storeroom. 


TO  D£Pi PRODUCTION  ORDER                 otoer  no._. 

BAre  Of  ISSUE _   __                                                                                                          ''«**"«G  "0- 



PAITE 
OMPLETED  BY    — SPECI 

TO  OEPT.      CLASS 

HH  NO . 

TO  BE  C 

DELivea 

FICATIOII  IIO^_.. 
MO. 

1 

PLf  AS£  EXECUTE  THE  FOLLOWING  ORDER  RETURNING  THIS  SLIP  TO  STOREKEEPER  ON  COMPLETION  OF  WORK 
CHARGE  AIL  LABOR  AND  MATERIAL  TO  THE  ABOVE  PRODUCTION  ORDER  NO. 

DESCRIPTION  OF  ORDER 

QUANTITY  AND  DESCRIPTION  OF  MATERIAL  TO  BE  USBO 

DATE 
NEEDED 

DEPT. 

DATE   0 

tnFH  rftMPiFTFD                                           .     .                      -APPROVED          --         -   _    _-    .                  \ 

Figure  6 

5.  Production  orders. — The  order  clerk  can  now 
issue  a  production  order,  as  illustrated  in  Figure  6, 
above,  to  the  foreman  under  whom  the  work  is  to 
be  done.  If  the  amount  of  material  to  be  drawn  is 
comparatively  small,  this  production  order  may  also 
be,  for  convenience,  the  material  list,  as  illustrated  by 
Figure  6.  This  is  not  an  essential  point,  however, 
since  the  material  list  may  be  on  a  separate  sheet,  or 


ISSUING  AND  EVALUATING  MATERIAL       65 

may  be  a  permanent  record,  made  on  the  drawing  it- 
self. The  production  order  will,  in  general,  give  all 
necessary  information  regarding  time  of  completion 
and  the  disposition  of  the  part  when  finished.  This 
order  will  also  bear  the  specification  number  or  the 
drawing  number  of  the  part  referred  to,  and  the 
production-order  number  to  which  the  cost  of  the  pro- 
duction is  to  be  charged.  Thus  the  part  is  identified 
with  the  time  cards  recording  the  details  of  its  pro- 
duction, which  are  to  be  returned  from  the  fac- 
to^J^ 

Clearly,  the  issuing  of  production  orders  requires 
not  only  an  intelligent  understanding  of  the  costs  thai 
are  desired,  but  also  a  thoro  comprehension  of  the 
manufacturing  problems  concerned.  A  single  pro- 
duction order  might  be  made  to  cover  a  battleship,  or 
a  separate  order  might  be  issued  for  every  individual 
part  going  into  this  same  ship.  On  the  one  hand,  it 
may  be  of  great  importance  to  know  with  accuracy 
the  cost  of  one  line  of  goods  in  which  competition  is 
very  keen,  whereas,  on  the  other  hand,  in  some  other 
line,  where  the  margin  of  profit  is  very  high,  it  may 
not  pay  to  obtain  very  accurate  costs. 

The  detail  in  which  it  is  necessary  to  know  the  cost 
of  the  several  parts  of  a  machine  will  vary  with  the 
machine  and  with  the  conditions,  and  the  grouping 
of  the  several  parts  under  production-order  numbers 
requires  good  judgment.  Furthermore,  if  best  re- 
sults are  to  be  obtained,  the  order  clerk  must  keep  in 
mind  the  uses  that  are  to  be  made  of  the  cost  data 


'66  COST   FINDING 

after  they  have  served  to  determine  the  costs  of  pro- 
duction. If  these  data  are  to  be  used  as  a  basis  for 
managerial  reports  of  a  comparative  nature,  this  fact 
may  somewhat  influence  the  issuance  of  the  produc- 
tion orders.  Obviously,  also,  if  segregated  expense 
accounts  such  as  are  listed  in  Section  1,  Chapter  IV, 
are  to  be  maintained,  all  expense  material  must  be 
drawn  from  stores  in  such  a  manner  that  it  will  be 
accurately  accounted  for.  It  requires  a  high-grade 
man  to  place  production  orders  so  as  to  get  the  results 
desired  and  yet  not  waste  money  on  details  that  are 
not  necessary. 

6.  Instructions  to  storekeeper. — The  production- 
order  and  material  lists  are  usually  made  in  multiple, 
one  copy  going  to  the  foreman  concerned,  with  all 
drawings  and  specifications  connected  with  the  work, 
and  constituting  his  permanent  authority  for  doing 
the  work.  Another  copy  goes  to  the  storekeeper, 
furnishing  authority  for  issuing  the  material  when  it  is 
demanded  by  the  foreman.  A  copy  is,  of  course,  re- 
tained by  the  order  clerk.  The  storekeeper  or  his 
assistant  issues  the  material  called  for,  cancels  his 
copy  and  corrects  his  record  of  material  on  hand, 
either  at  the  bin,  or  on  the  stores  ledger,  if  one  is  kept. 
If  a  stores  ledger  is  kept  the  record  of  the  transaction 
may  be  recorded  under  "issues"  on  the  proper  stores 
ledger  sheet.  The  production  order  can  then  be 
evaluated,  the  price  per  pound  or  piece  being  filled 
in,  and  it  can  be  forwarded  to  the  cost  department 
to  be  incorporated  into  the  cost  of  the  part  to  which 


ISSUING    AND    EVALUATING    MATERIAL     67 

the  particular  production  number  belongs.  A  simi- 
lar procedure  could  be  followed  with  the  simpler  form 
of  requisition  issued  by  the  foreman,  but,  for  reasons 
previously  pointed  out,  requisitions  thus  originated 
are  apt  to  be  inaccurate. 

Theoretically,  this  method  is  very  accurate.  In 
practice,  however,  it  is  difficult  to  specify  with  abso- 
lute exactness  every  item  of  direct  material  needed; 
but,  except  in  the  case  of  very  complex  work,  the 
errors  need  not  be  serious.  The  chance  of  error  is 
more  than  compensated  for  by  the  manner  in  which 
the  method  prevents  unnecessary  withdrawal  of  direct 
material,  and  fixes  the  proper  authority  and  respon- 
sibility for  withdrawal  in  such  a  manner  that  errors 
and  irregularities  can  be  instantly  traced  to  those 
responsible. 

7.  Emergency  requisitions. — A  great  objection 
often  made  to  such  a  system  is  that  it  is  not  flexible 
under  emergencies,  and  that  small  jobs  always  cost 
more  when  passed  thru  such  a  system  than  they  would 
if  managed  by  a  simpler  one.  For  example,  when  a 
serious  breakdown  in  the  machinery  of  production  oc- 
curs there  is  little  time  to  make  bills  for  material  and 
to  write  requisitions  for  them;  and  when  repairs  are 
being  made  while  the  factory  is  temporarily  idle,  a 
rigid  requisition  system  may  be  embarrassing  and 
may  greatly  hamper  the  progress  of  the  work. 
Again,  in  making  commercial  repairs  it  may  not  pay 
to  make  drawings,  or  even  sketches,  and  write  out 
bills  of  material  based  upon  them;  moreover,  when 


68  COST  FINDING 

this  procedure  is  carried  out  the  cost  of  such  repairs 
may  be  excessive. 

These  defects  can  be  partly  obviated,  however,  by 
empowering  some  official  to  issue  emergency  requisi- 
tions to  take  care  of  these  special  cases.  In  such  in- 
stances the  official  possessing  this  emergency  authority 
would  issue  the  material  requisitions  that  are  needed, 
and  have  proper  production  orders  assigned  as  soon 
as  possible  thereafter.  Provision  must  alwaj^s  be 
made  for  caring  for  emergencies  in  any  system,  or 
its  inflexibility  may  destroy  its  usefulness.  Many 
good  cost  systems  and  other  systems  have  failed  on 
this  account.  Some,  in  fact,  have  been  unable  to 
obtain  even  a  good  foothold  in  shops  where  they  were 
being  introduced,  largely  because  impatient  foremen 
or  superintendents,  who  are  being  hard  pressed  for 
production,  fear  that  a  new  system  will  destroy  flexi- 
bility, even  tho,  perhaps,  it  improves  other  manufac- 
turing conditions. 

The  foregoing  discussion  has  reference  largely  to 
manufacturing  enterprises  of  the  intermittent  type, 
tho  the  principles  are  general  and  apply  to  many 
other  forms  of  industry.  As  the  enterprise  ap- 
proaches more  closely  the  other  extreme,  or  continu- 
ous operation,  the  necessity  of  detail  becomes  less 
and  less,  until  finally  no  production  order  for  direct 
material  may  be  needed,  since  all  material  will  be 
purchased  in  large  quantities  and  its  value  will  be 
carried  directly  to  the  general  books. 

8.  Requisitioning  indirect  material, — Indirect  ma- 


ISSUING    AND    EVALUATING    MATERIAL       69 

terial,  such  as  coal,  waste,  oil,  brooms,  and  the  like, 
is  not  handled  by  production  order.  Usually  this 
class  of  material  is  drawn  on  the  foreman's  requisi- 
tion. It  is  still  customary  in  many  factories  to  have 
the  foreman  assign  the  order  number  to  which  the 
supplies  drawn  are  to  be  charged,  this  number  being, 
in  general,  the  production-order  number  on  which  the 
workman  is  at  the  time  employed.  As  will  be  ex- 
plained later  (see  Section  7,  Chapter  VIII),  such 
supplies  should  be  charged  to  standing-order  num- 
bers, if  intelligent  costs  are  to  be  obtained,  and  dis- 
tributed by  one  of  the  methods  to  be  discussed.  The 
storekeeper  evaluates  the  foreman's  requisition  for  in- 
direct material  and  sends  it  to  the  cost  department. 
It  should  be  noted  in  passing  that  where  supplies  are 
drawn  in  very  small  quantities  it  is  difficult  in  some 
cases  to  keep  an  exact  record.  Thus  it  would  be  diffi- 
cult to  keep  an  accurate  record  of  lubricating  oil ;  sup- 
plies of  this  kind  are  often  charged  in  a  lump  to  the 
proper  expense  order.  But  even  in  such  cases  it  is  a 
useful  check  on  waste  to  issue  the  supplies  only  on  a 
requisition. 

9.  Valuation  of  issued  material. — The  value  of  ma- 
terial stored  in  the  bins  of  the  storeroom  is  neces- 
sarily somewhat  greater  than  the  purchase  value  of 
similar  material.  Freight,  cartage,  the  handling  of 
the  material  in  storing  it,  rent,  or  interest  on  the  build- 
ing investment,  insurance,  wages  of  storekeepers, 
waste,  shrinkage  in  use,  as  by  saw-cuts  and  remnants, 
defective  pieces,  repairs  and  other  storeroom  expenses, 


70  COST  FINDING 

are  all  necessary  expenditures  which  must  be  paid  in 
order  to  obtain  the  advantages  of  having  material 
ready  for  immediate  use.  This  expense  should  never 
be  overlooked  in  evaluating  the  material  issued  from 
the  stores,  particularly  if  material  should  be  shipped 
directly  to  a  customer  fi'om  the  storeroom,  as  is  done 
in  mercantile  estabhshments.  Unless  the  billing  price 
of  such  goods  is  an  advance  on  the  market  price  paid 
for  them,  it  is  evident  that  a  loss  will  be  incurred. 
In  fact,  it  is  sometimes  more  profitable  for  a  factory 
to  order  standard  material  to  be  sent  directly  from 
dealer  to  customer  than  it  would  be  to  fill  the  order 
from  the  storeroom  bins. 

Furthermore,  material  is  crystallized  capital  which 
is  earning  no  interest.  It  is  perfectly  proper,  there- 
fore, to  charge  against  it  the  interest  that  it  should 
earn;  and  this,  again,  adds  to  its  value.  Materials 
also  may  depreciate  in  value  while  stored,  and  while 
this  loss  in  value  is  a  proper  charge  against  produc- 
tion it  is  usually  more  convenient  to  handle  it  in  a 
manner  separate  from  those  methods  now  to  be  dis- 
cussed. 

In  the  simpler  and  merely  approximate  methods  of 
cost  finding,  all  storeroom  expenses  are  carried  to  the 
factory-expense  account  and  charged  off  as  part  of 
this  expense.  While  this  insures  that  the  total  of 
such  expense  is  cared  for,  it  does  not  distribute  it  logi- 
cally, and  more  modern  methods  of  cost  finding  dis- 
tribute storeroom  expense  as  a  percentage  on  the 
yalue  of  the  material  issued,     This,  as  will  be  seen 


ISSUING  AND  EVALUATING  MATERIAL        71 

later,  is  in  accord  with  modern  tendencies,  which  aim 
to  allocate  all  expenses,  as  far  as  possible,  to  the  par- 
ticular activity  to  which  they  peculiarly  belong.  The 
value  of  issued  material  should,  therefore,  be  deter- 
mined by  adding  freight  and  cartage  to  the  invoice 
price  of  the  goods  and  then  adding  a  percentage  to 
cover  storeroom  expenses.  See  Section  2,  Chapter 
XIIL 

Now,  the  invoice  price  of  the  same  goods  changes 
constantly  with  the  changing  market  price.  The  ma- 
terial in  a  given  bin  may  have  cost  more,  or  less,  than 
a  new  lot  which  has  just  been  added.  To  equalize 
this  difference  in  prices,  the  total  value  of  the  entire 
lot  may  be  divided  by  the  total  combined  number  of 
pieces  or  pounds  and  a  new  average  rate  determined 
"which  will  equalize  the  market  fluctuations. 

10.  Value  of  material  in  process  of  fabrication. — 
It  will  be  noted  that  the  foregoing  storeroom  methods 
do  not  take  cognizance  of  materials  that  are  in  process 
of  fabrication.  JNIodern  accounting  methods,  how- 
ever, often  require  regular  and  frequent  statements 
of  the  financial  conditions  of  the  enterprise.  If  the 
latter  is  of  the  continuous  tj-^pe,  where  the  value  of 
the  material  in  process,  at  any  time,  is  not  great,  the 
methods  described  above  may  be  adequate  for  all  pur- 
poses. In  many  cases,  however,  the  value  of  the  ma- 
terial in  process  is  very  great,  and  no  correct  state- 
ment of  the  business  can  be  rendered  without  taking 
it  into  account. 

It  is  obvious  that  it  would  be  well-nigh  impossible 


72  COST  FINDING 

to  keep  account  of  the  cost  of  the  material  in  process 
by  simply  adding  to  its  value  the  value  of  the  material 
drawn  from  stores,  and  subtracting  the  value  of  the 
material  delivered  to  the  stores  or  the  shipping  room, 
For  this  reason,  even  in  factories  where  some  lines  of 
product  are  in  continuous  production,  it  is  customary 
to  pass  the  product  thru  the  factory  in  lots,  a  produc- 
tion order  being  issued  for  each  lot.  If  a  cost  ledger 
is  kept,  an  account  would  be  opened  for  each  lot  under 
its  own  production  number,  and  all  material  which 
went  into  the  lot  would  naturally  find  its  way  to  this 
account  and  could  be  evaluated  at  any  time.  The 
total  value  of  all  material  appearing  in  the  cost  ledger 
is  the  value  of  all  material  in  process. 

11.  Value  of  finished  parts. — So  far  as  the  produc- 
tion department  is  concerned,  finished  parts  manu- 
factured for  stores  do  not  differ  from  other  products, 
and  they  should  bear  their  full  share  of  all  indirect 
expense.  This  should  be  kept  in  mind  in  evaluating 
such  parts,  since  factory  expense  is  an  integral  part 
of  shop  cost.  Thus,  one  manufacturer  might  buy 
from  another  manufacturer  some  finished  parts,  such 
as  gears,  for  instance,  storing  them  in  his  regular 
storeroom,  and  issuing  them  to  the  factory  at  the  cost 
price  plus  the  cost  of  handling  them  in  the  storeroom. 
Or  he  might  make  these  gears  himself,  keeping  ac- 
count of  all  labor,  material  and  indirect  expense  in- 
volved in  their  production,  and  then  deposit  them  in 
his  finished-parts  storeroom,  assigning  to  them  the 
value  thus  determined. 


ISSUING  AND  EVALUATING  MATERIAL        73 

In  issuing  such  manufactured  finished  parts  to  cus- 
tomers for  repairs,  they  would,  of  course,  be  charged 
with  their  proper  share  of  general  expense  and  with 
an  allowance  for  profit,  just  as  in  the  case  of  any  other 
finished  product.  In  issuing  them  to  the  production 
department  to  be  used  in  assembling  complete  ma- 
chines they  would  be  treated  hke  any  other  material  or 
finished  parts  that  have  been  bought  elsewhere.  Care 
must  be  exercised,  however,  to  see  that  expense 
charges  are  not  duplicated.  Thus,  if  the  material 
value  is  used  as  the  basis  in  distributing  the  expense  it 
would  not  be  logical  to  charge  the  expense  on  this 
basis  when  putting  the  finished  parts  into  the  store- 
room, and  then  to  duplicate  this  procedure  when  the 
parts  are  assembled  into  finished  machines.  The  best 
method  of  distributing  the  expense  on  finished  parts 
will  be  clearer  after  a  discussion  of  the  methods  by 
which  such  distribution  is  accomplished.  This  mat- 
ter is  treated  fully  in  Chapter  VIII. 

12.  Value  of  finished  product  and  stock. — When  a 
product  is  made  to  order  it  is  usually  shipped  to  the 
customer  when  completed,  the  factory  cost  is  sum- 
marized from  the  cost  ledger  or  corresponding  record, 
the  necessary  additions  for  general  expense,  selling 
expense,  and  profit  are  added  and  the  transaction 
is  closed  except  for  the  collection  of  payment. 
Where  the  product  is  made  in  anticipation  of  the 
market,  and  especially  where  production  necessarily 
is  in  large  lots,  the  finished  product  must  be  held  in 
storage  till  sold.     A  lai'ge  factory  may  have  not  only 


74.  COST  FINDING 

a  large  stock  of  finished  goods  In  the  central  stock- 
room at  the  factory,  but  also  branch  offices  which 
carry  such  finished  product.  The  amount  of  money 
so  tied  up  may  be  very  great. 

The  general  and  selling  expenses  are  usually  dis- 
tributed over  the  product  as  a  percentage  on  the  fac- 
tory cost.  It  is  no  longer  necessary  to  keep  the  labor 
and  material  components  of  cost  separated.  The 
cost-ledger  account  may  therefore  be  closed,  and  the 
finished  product  may  be  listed  on  the  stock  records 
at  factory  cost.  The  methods  of  distributing  general 
and  selling  expenses  will  be  discussed  in  a  later  section. 

It  should  be  carefully  noted  that  the  factory  cost 
placed  upon  the  product  when  it  is  deposited  in  the 
storeroom  is  not  necessarily  the  permanent  value  of 
the  article  in  question.  The  factory  cost  represents 
the  investment  in  labor  and  material  up  to  this  point 
and,  like  any  other  investment,  it  may  change  in  value. 
Theoretically,  if  the  article  should  lie  in  the  storeroom 
for  a  year,  its  actual  cost  to  the  factory  management 
would  be  increased  by  the  interest  on  the  investment 
and  the  cost  of  storage.  Practically,  howev-er,  most 
product  begins  to  deteriorate  from  the  moment  of  its 
production,  either  from  the  action  of  the  elements  or 
because  of  progress  or  change  in  the  methods  by  which 
the  product  is  manufactured.  A  full  discussion  of 
this  phase  of  material  values  may  be  found  in  Chap- 
ter IX. 

13.  Material  wastes. — A  most  important  feature  of 
the  care  and  accounting  of  materials  is  the  matter  of 


ISSUING  AND  EVALUATING  MATERIAL        75 

waste.  Every  factory  has  its  own  peculiar  sources  of 
waste.  These  should  be  carefully  located  and  their 
effect  minimized  as  far  as  possible.  Wastes  are  of 
two  general  kinds;  they  may  be  classified  as  avoidable 
and  unavoidable  wastes.  Those  due  to  carelessness  in 
handling  or  overissuing  material  are  what  may  be 
called  avoidable  wastes,  as  are  also  losses  by  pilfering, 
or  from  the  diverting  of  material  from  the  factory  in 
any  way  without  compensation.  A  well-kept  stores 
ledger  and  a  careful  periodical  checking  up  of  ma- 
terial on  hand  will  minimize  losses  of  this  kind.  If 
more  material  is  issued  than  is  actually  needed  for  the 
work  in  hand  serious  loss  is  sure  to  occur.  Material 
left  over  from  productive  work  is  not  likely  to  be  re- 
turned to  stores  unless  a  special  effort  is  made  to  bring 
this  about.  Ordinarily  it  will  lie  around  the  shop  in 
boxes  and  under  benches,  and  much  of  it  will  find  its 
way  into  irrecoverable  scrap.  Material  requisitions 
should,  therefore,  be  drawn  with  care  to  minimize  this 
form  of  loss,  and  any  material  left  over  from  a  given 
job  should  be  carefully  returned  to  stores  and  credited 
to  the  work  for  which  it  was  originally  requisitioned. 
Unavoidable  wastes  are  such  wastes  as  are  incurred 
in  cutting  up  material.  Thus  the  waste  due  to  cut- 
ting up  copper  bars,  either  by  saw  cuts  or  under 
presses,  may  be  considerable.  Even  with  cheaper  ma- 
terial, as,  for  instance,  sheet  steel,  where  large  quanti- 
ties are  used,  the  value  of  the  scrap  may  be  great. 
If  the  waste  is  in  such  form  that  it  may  be  returned 
to  stores  and  used  for  other  purposes,  the  job  in  ques- 


76  COST  FINDING 

tion  may  be  credited  with  the  value  of  the  scrap  inci- 
dent to  its  production.  In  fact,  in  some  cases  if  this 
procedure  is  not  followed  the  material  cost  will  be 
prohibitive.  But  in  any  case  all  scrap  and  waste 
should  be  carefully  noted  and,  if  salable,  it  should  be 
gathered  up  and  stored,  pending  such  sale.  Not  the 
least  important  feature  in  the  handling  of  material 
is  to  impress  on  foremen  and  workmen  the  fact  that 
material  represents  money  and  should  be  treated  ac- 
cordingly, s  j 
It  will  be  clear  that  the  value  of  the  material  pur- 
chased, as  recorded  in  the  general  ledger  account, 
may,  and  generally  will,  exceed  the  value  of  the  ma- 
terial as  charged  to  production,  in  the  cost  ledger, 
by  the  amount  of  the  storeroom  wastes  and  losses. 
Storeroom  losses  from  pilfering  or  carelessness,  or 
from  overissuing  or  from  issuing  without  a  requisi- 
tion, do  not  appear  in  the  costs,  and  sometimes  these 
losses  are  considerable.  In  some  kinds  of  manufac- 
turing such  differences  are  difficult  to  check  up;  but 
wherever  it  is  possible  this  should.be  done  periodic- 
ally. A  similar  discrepancy  may  exist  between  the 
time  paid  for  on  the  pay-roll  and  the  time  charged  by 
the  cost  system  against  the  same  piece  of  production. 
It  is  generally  easier,  however,  to  minimize  this  dif- 
ference in  the  case  of  labor  than  it  is  in  the  case  of 
materials. 

REVIEW 

Rule  from  memory  a  form  of  production  order.     How  doea 
your  ruling  compare  with  that  of  the  text? 


ISSUING  AND  EVALUATING  MATERIAL       77 

What  are  the  movements  of  the  production  order,  from  its 
origin  to  its  final  destination? 

What  are  the  usual  causes  of  discrepancy  between  the  phys- 
ical inventories  and  the  book  inventories?  What  steps  would 
you  take  to  reduce  the  discrepancies? 

On  what  basis  would  you  distribute  storeroom  expense? 

How  should  valuation  be  made  of  issued  material  ?  Of  finishea 
parts? 


CHAPTER  VI 

EVALUATION  OF  LABOR  COSTS 

1.  Recording  time  by  checkboard. — No  matter 
what  wage  system  is  in  use  in  the  factory,  it  is  usually 
desirable  to  record  the  time  at  which  every  employe 
enters  and  leaves  the  works.  In  very  small  plants 
the  foreman  is  usually  depended  upon  to  enforce 
regularity,  but  the  limitations  to  this  method  are  ob- 
vious. In  larger  plants  each  workman  is  given  a 
number,  which  identifies  him  also  on  the  detail  work 
cards  to  be  discussed  later.  In  some  factories  each 
man  on  entering  takes  from  a  checkboard  a  brass 
check  bearing  his  number  and  drops  it  into  a  box  pro- 
vided for  the  purpose.  Under  other  systems  he  re- 
ceives his  check  on  leaving  the  works  and  deposits  it  on 
entering  the  works  again.  The  timekeeper  notes  the 
absentees  by  means  of  the  checks  remaining  on  the 
board.  Late-comers  are  noted  by  the  checkboard 
watchman;  so,  also,  are  those  leaving  early,  the  latter 
being  passed  out  on  a  special  card  signed  by  a  fore- 
man. Such  a  system  insures  an  accurate  tally  of  all 
men  entering,  and  is  useful  in  a  very  large  works,  ir- 
respective of  other  checks  which  may  be  employed. 
Promptness  and  faithfulness  are  essential  to  efficiency, 
and  there  is  nothing  so  fatal  to  the  discipline  and 

78 


EVALUATION  OF  LABOR  COSTS  79 

the  efficient  management  of  a  factory  as  irregular 
attendance  on  duty.  It  should  be  noted,  however, 
that  the  checkboard  placed  at  the  main  entrance  of 
a  large  works  does  not  insure  the  prompt  arrival  of 
all  workmen  at  their  places,  and  it  is  often  supple- 
mented by  other  time-recording  devices  which  are 
placed  in  the  several  departments. 

2.  Time-recorders. — In  moderate-sized  plants  the 
time  recorder  is  much  more  serviceable  than  the 
checkboard.  There  are  many  forms  of  thne  record- 
ers, but  the  general  principles  involved  in  their  use  do 
not  differ  materially.  Usually  each  workman  is  pro- 
vided with  a  card  similar  to  Figure  7  (page  80). 
On  entering  the  works  he  takes  his  card,  which  bears 
his  name  and  number,  inserts  it  in  a  slot  in  the  re- 
corder and  presses  a  button,  or  lever,  which  causes 
the  mechanism  to  record  the  time  at  which  this  opera-^ 
tion  is  performed,  as  illustrated  in  Figure  7.  When 
he  leaves  the  works  the  operation  is  repeated,  the 
clock  being  adjusted  in  the  meantime  to  print  the 
time  in  the  "out"  column.  The  card  is  therefore  a 
complete  record  of  the  time  during  which  the  work- 
man has  been  in  the  works,  but  does  not  necessarily 
record  his  productive  time  unless  used  specifically 
for  such  a  purpose.  Such  clocks  may  be  placed 
on  the  several  floors  so  that,  if  desired,  they  may  be 
used  also  for  dating  work  cards.  Where  the  clock 
is  used  simply  to  check  the  men  coming  in  and  going' 
out,  a  card  of  the  form  illustrated  in  Figure  7  is 
usually  employed.     In  some  cases  two  sets,  of  dif- 

.  XII— 7 


80 


COST  FINDING 


ferent  colors,  are  employed,  one  being  in  use  on  Mon- 
day, Wednesday  and  Friday  and  kept  in  the  office  on 
alternate  days  for  posting.     The  other  set  is  used 


Wffk  Enbino                                  may  30                                               ^c,r,y 

154 

NAME 

DAY 

MORNING 

AFTERNOON 

EXTRA 

IN 

OUT 

IN 

OUT 

IN 

OUT 

MON. 

M    6   55 

Ml2oi 

M1256 

M  6  01 

TUE. 

J    6   59 

T  12o5 

T    1257 

J  6  11 

Wed, 

^6    58 

y/12oi 

V/12  59 

W3    30 

-2./^ 

Thu. 

J    6   53 

T  1203 

T  1251 

J    6    08 

J   6    58 

T   1002 

+  3 

Fhi. 

p     7    30 

F  12oH 

-5'k 

Sat. 

S    6   57 

S    1208 

S   1     0' 

§     6    U9 

Sun. 

TOTAL    TIME                               viO                                                    MRS. 
I14TF                                             vi/  •<-  /2_/                         pFH  MB. 
TDTAI    WARFR  FDR  WEEK,     *      /  V      OO 

Figure  ^ 


on  the  other  days  in  a  similar  manner.  In  simpler 
systems,  where  the  cost  keeping  is  of  less  importance, 
the  time  record  is  made  on  a  continuous  paper  rib- 
bon; and,  again,  in  some  systems  a  clock  centrally  lo- 


EVALUATION  OF  LABOR  COSTS  81 

cated  is  operated  by  push-buttons  which  may  be  vari- 
ously placed  at  a  distance  from  the  clock. 

Methods  such  as  these  provide  for  the  accurate  re- 
cording of  the  total  time  worked,  but,  in  general,  do 
not  show  anything  regarding  the  character  of  the 
work  performed  or  the  purpose  for  which  it  is  in- 
tended. In  the  case  of  certain  classes  of  clerical  and 
administrative  employes  working  at  fixed  duties  and 
paid  by  the  month,  the  time-clock  record,  as  noted 
above,  may  be  sufficient,  and  in  such  cases  the  card 
shown  in  Figure  7  may  also  be  used  as  a  pay-roll, 
as  indicated  at  the  bottom  of  the  card,  provided,  of 
course,  that  the  clock  record  is  checked  up  in  the  man- 
ner to  be  described.  But  where  it  is  necessary  to 
make  accurate  distribution  of  the  labor  expended,  an 
additional  record  must  be  made. 

3.  Traveling  timekeeper. — There  are  two  general 
methods  of  collecting  the  time  of  each  man  in  detail. 
Under  the  first  method  a  traveling  timekeeper  visits 
each  employe  daily,  having  first  checked  off  the  ab- 
sentees of  the  day  before  from  the  checkboard  record, 
if  one  is  in  use.  From  each  man  he  obtains  a  record 
in  detail  of  his  work  of  the  previous  day — that  is,  the 
number  of  hours  expended  on  each  order  number. 
He  records  in  a  book  the  data  so  obtained,  with  a 
memorandum  of  the  class  of  work  or  the  machine 
usedj  and  this  serves  as  the  basis  of  charging"  up  the 
work  to  the  several  orders.  Such  methods  are  not  to 
be  recommended  even  in  the  simple  case  where  every 
man  is  on  daywork.     The  busy  workman  is  not  likely 


82  COST  FINDING 

to  make  a  record  at  the  time  the  work  is  performed 
and  his  memory  is  unreliable  when  he  is  called  on  to 
record  the  result  of  the  previous  day's  duties.  The 
clerical  work  involved  is  also  considerable,  and  where 
a  large  number  of  men  are  employed,  and  especially 
where  the  number  of  shop  orders  is  great,  the  time 
book  becomes  bulky  and  complex.  When  the  piece- 
work plan  and  the  more  complex  premium  and  bonus 
system  are  used,  the  traveling  timekeeper  is  inade- 
quate, especially  if  the  number  of  men  employed  is 
large. 

4.  Job  tickets. — The  more  modern  and  also  more 
accurate  method  of  obtaining  time  distribution  is  by 
means  of  the  work  card,  or  "job  ticket",  as  it  is  often 
called.  There  are  three  types  of  these  tickets  which 
may  be  noted: 

(a)  The  work  card  which  is  attached  to  the  ma- 
terial when  it  is  issued  from  the  storeroom,  and  which 
accompanies  it  thru  the  shop,  the  labor  of  each  man 
who  works  upon  it  being  recorded  as  the  material 
progresses. 

(b)  The  work  card  which  is  issued  to  the  individ- 
ual workman  daily  by  the  foreman,  and  on  which  the 
workman  records  the  details  of  his  day's  work,  giving 
the  order  number  of  each  job  worked  on  and  the  time 
expended  upon  it. 

(c)  The  individual- job  work  card  issued  by  the 
foreman  to  the  workman  for  each  and  every  job 
worked  on,  and  on  which  is  recorded  the  order  num- 
ber and  the  time  expended  on  one  job  only. 


EVALUATION  OF  LABOR  COSTS 


8S 


The  limitations  of  the  first  type  are  obvious.  In 
small  shops  and  for  certain  classes  of  work  it  is  appli- 
cable, but  the  constant  handhng  of  such  cards,  in  a 
machine  shop,  for  instance,  reduces  them  in  a  short 
time  to  an  unintelligible  state.  Furthermore,  the  ac- 
curacy of  the  information  thus  gained  is  open  to  ques- 


DAILY-TIME  TICKET 

g         DATg    ^^W  /' 1921 

WORKMAN  <;  Nf).       -^(a                     NAMF                ^.i^^C-vw --<^>ri.c;z::iC- 

//                                                                              1 

JOB   NO. 

OPERATION 

HOURS 

RATE 

VALUE 

Go 

^O-^-tU-iU? 

JL 

•  3o 

(.O 

/7S- 

J 

^■k 

t> 

/ 

OS- 

^s--^ 

'■ 

z-k 

It 

7S- 

rs- 

- 

z. 

,. 

Go 

TOTAL 

3 

O  O 

FOREMAN 

AHJ"^^  ^cryt,^^ 

c/ 

Figure  8 


tion  and  it  cannot  be  recorded  conveniently  until  the 
job  is  finished;  as  a  result,  therefore,  there  is  a  lag  in 
the  cost  records. 

The  second  form  of  job  ticket  is  shown  in  Figure 
8,  above.  Upon  this  ticket  provision  is  made  for 
noting  the  time  expended  on  the  several  orders  on 
which  the  man  has  worked  during  the  ^2iw.  Its  sole 
advantage,  therefore,  over  the  traveling-timekeeper 


84  COST  FINDING 

method  is  that  the  workman  is  provided  with  a  syste- 
matic method  of  keeping  his  own  time,  but  it  is  open 
to  the  same  criticism  of  possible  inaccuracy  as  is  the 
timekeeper  system.  The  second  form  of  card  is  supe- 
rior to  the  first,  however,  since  by  means  of  it  returns 
are  made  daily,  and  can  be  checked  more  readily  by 
the  foreman  as  they  are  turned  in.  These  returns  can 
also  be  used  to  check  up  the  time  recorded  by  the 
workman  on  the  time  clock  or  checkboard  at  the  shop 
entrance.  The  work  of  posting  up  the  time  charges 
against  the  several  order  numbers  is  cumbersome, 
however,  if  there  are  many  such  orders  in  progress; 
moreover,  they  are  awkward  to  analyze  for  the  pur- 
pose of  making  cost  reports,  because  the  work  on  sev- 
eral order  numbers  may  be  placed  on  the  same  job 
ticket,  as  shown  in  Figure  8.  It  is  difficult,  also,  to 
trace  disputed  items  after  the  job  tickets  have  been 
posted,  since  they  cannot  be  filed  under  separate  order 
numbers. 

The  third  type  of  ticket  is  by  far  the  most  flexible 
and  the  most  comimonly  used.  As  before  stated,  a 
separate  ticket  is  issued  to  each  man  for  each  job 
worked  on  each  day  and  all  tickets  are  collected  daily. 
Figure  9,  opposite,  illustrates  such  a  card  arranged 
for  dayworkers.  It  bears  the  workman's  name  and 
number,  the  date,  and  the  order  number  of  the  job. 
It  may  be  arranged,  as  in  Figure  9,  so  that  the  work- 
man may  check  off  not  only  the  elapsed  time  expended 
on  the  job,  but  also  the  character  of  the  operation  in- 
volved.    Thus  the  need  of  any  writing  on  the  part  of 


DAYWORKER'S  CARD 

1 

2 
3 
1 
5 
6 
7 
g 
9 
10 
11 
12 
13 
11 
15 
16 
17 

ASSEMBLINQ 

BALANCING 

BANDING 

BUILD.  UP 

BURR.  SEGMENTS 

CHIPPING 

CLOSING  UP 

riTTING 

HOT  PRESS 

PRESS  ON  COM. 

PRESS  ON  COLL. 

RIVETING 

SOLDERING 

TAKING  DOWN 

PAINTING 

CONNECTING 

INSULATING 

MAN'S  NO. 

DEPT. 

DATE 

ORDER  NO. 

DRAW  HO. 

PATT.OH  PRT.NO. 

MO.  PIECE* 

O.T. 

HOURS 

RATE 

VAIOI 

1 

DESCRIPTION  OF  WORK 

6 

» 

7 

h 

s 

1 

9 

i 

10 

i 

11 

i 

12  1 

i 

r 

i 

3 

} 

M 

1 

5 

J 

6 

i 

7 

i 

8 

i 

9 

i 

10 

S 

AP 

;>flOVED 

FOREMAN 

FlOCBE    9 


PIECEWORKER'S  CARD 

1 
2 
3 
4 
5 
6 

8 
9 
10 
11 
12 
13 
11 
15 
16 
17 

ASSEMBLING' 

BALANCING 

BANDING 

BUILD.  UP 

BURR.  SEGMENTS 

CHIPPING 

CLOSING  UP 

FITTING 

MOT  PRESS 

PRESS  ON  COM. 

PRESS  OH  COLL- 

RIVCTING 

SOLDERING 

TAKING  DOWN 

PAINTING 

CONNECTING 

INSULATING 

MANS  NO. 

DEPT. 

DATE 

ORDER  NO. 

MAN'S  NAME 

DRAW  KG. 

PATT.ORJ>«T.NO. 

OPERATION  NO. 

MRS. 

PIECES 

PRICE 

VALUE 

PER 

PER 

PER 

PER 

PER 

8 

» 

7 

J 

8 

i 

> 

» 

10 

i 

It 

\ 

12 

1 

J 

2 

i 

3 

t 

1 

5 

i 

« 

i 

h 

i 

8 

i 

9 

J 

lu 

i 

FOREMAN 

FlOUBE   10 


85 


86  COST  FINDING 

the  workman  is  obviated  and  by  so  doing  much  time  is 
saved  and  mistakes  due  to  illegibility  are  avoided. 

Figure  10  (page  85)  shows  a  similar  card  arranged 
for  pieceworkers.  In  addition  to  the  general  infor- 
mation given  on  the  dayworker's  card  this  card  records 
the  number  of  pieces,  the  rate  per  piece,  and  also  the 
elapsed  time.  This  last  has  nothing  to  do  with  the 
workman's  pay,  but  is  recorded  so  as  to  check  up  the 
total  time  against  the  clock  record,  for  reasons  already 
noted. 

Figure  11,  opposite,  illustrates  a  work  card  which 
has  been  used  by  Mr.  Gantt  for  recording  bonus  time. 
It  records  the  time  allowed,  the  time  actually  taken, 
the  bonus  and  the  total  time  for  which  the  payment  is 
to  be  made.  Provision  is  also  made  for  the  inspector's 
approval  for  both  quality  and  quantity. 

All  of  these  cards,  as  will  be  noted,  record  full  infor- 
mation regarding  the  job.  They  all  record  the  work- 
man's name  and  number,  the  order  number,  the  part 
and  drawing  numbers,  as  well  as  full  information  re- 
garding the  operation  performed.  The  operation  and 
its  cost  are  therefore  identified  fully  with  the  order 
number,  and  full  information  is  recorded  for  statistical 
use,  if  this  be  desired.  The  forms  of  job  ticket  shown 
in  Figures  9,  10  and  11  lend  themselves  admirably  to 
statistical  purposes,  for,  since  only  one  order  number 
is  recorded  on  each  ticket,  the  sorting  and  arranging 
of  these  tickets  by  order  number  and  classes  is  an  easy 
matter. 

5.  Other  time-recording  devices. — While  the  job 


EVALUATION  OF  LABOR  COSTS 


87 


tickets  discussed  in  the  preceding  section  assist  greatly 
in  securing  accurate  time  records,  it  is  clear  that  they 
are  not  proof  against  errors,  especially  in  the  hands  of 


ISS'D 
RET'D 


JUN  2  7-00  AM   1921 
JUN  2  6-00  PM   1921 


MAN'S  NAME 

Doe, John 


TIME 
ALLOWED 


70.0  o 


Z.So 


PAY  FOR 

/Z.So 


TIME 

TAKEN        /O.CrO 


HOURLY 
RATE 


v^ 


WAGES 


3 


7-^ 


RART  AND 
ORDER  NO 


./4/^3 


MAN'S  NO. 

P.M. 23 


FINISHED 


NOT  FINISHED 


TRANSFERRED 


BREAKDOWN 


CAUGHT  UP 


NAME  OF  PART  OR  JOB 


Obo^£6 


OPERATION    NAMC 


MACHINE  NO. 


NO.  nccu 

FINWHCO 


/ 


DPM/SB 


>3o 


PMiB 


ENTERED  IN 


O.K.  FOR  QUALITY 


O.K.  FOA  QUANTITY 


■pofm  APR  14, 


Figure  11.    Work  Card  for  Bonus  Workers 


ignorant  or  careless  workmen.  For  this  reason,  pro- 
vision is  sometimes  made  for  stamping  the  time  of 
starting  and  the  time  of  finishing  each  job  by  means 
of  a  time-clock  instead  of  having  the  workman  check 


88  COST  FINDING 

them  off  by  hand.  This  is  illustrated  in  Figure  11,  on 
the  upper  left  side  of  the  card.  In  such  cases  the 
time  of  starting  the  work  is  stamped  on  the  card  by 
the  assistant  to  the  foreman,  and  when  the  operation 
is  completed  the  workman  presents  the  card  to  the 
assistant,  who  stamps  the  time  of  completion  and 
issues  a  new  card  with  a  new  starting  time  stamped 
thereon.  Another  device,  a  form  of  time-clock  which 
prints  elapsed  time,  has  also  been  used  to  facilitate  the 
operation  of  time  recording.  There  are  a  number  of 
such  devices  now  in  use,  some  of  which  have  proved 
to  be  very  practical.  These  differing  methods  in  no 
way  affect  the  essential  principles  involved,  being  of 
the  nature  of  mechanical  aids  only. 

One  fundamental  principle  should  be  carefully  ob- 
served, whatever  may  be  the  system  of  time  recording, 
namely:  Every  piece  of  direct  production  should 
have  a  distinctive  order  number  assigned  to  it,  and 
every  kind  of  indirect  work  should  have  a  permanent 
or  standing-order  number  which  remains  fixed  until 
changed  by  the  cost  keeper.  No  work  of  any  kind 
should  be  performed  that  is  not  authorized  by  the 
proper  officials  and  covered  by  a  production  order  or 
a  standing-order  number. 

6.  Summarizing  time  and  labor  returns. — All  work 
cards  are  usually  approved  by  the  proper  foremen  and 
are  then  forwarded  to  the  timekeeper,  who  checks  the 
daily  total  of  each  man's  card  with  his  clock  or  check- 
board  record.  These  should  of  course  agree.  If  the 
worker  is  on  day  pay  this  total  forms  the  basis  of  his 


EVALUATION  OF  LABOR  COSTS  89 

daily  wage.  If,  however,  he  is  on  piece  or  premium 
work,  the  proper  additional  data  must  be  added  to  the 
pay-roll,  tho  the  total  time  recorded  must  check  as  be- 
fore. The  exact  method  of  recording  premium  and 
bonus  earnings  will  necessarily  vary  with  the  character 
of  the  work  and  the  pay  system  in  use,  but  in  any  case 
there  should  be  an  exact  balance  between  the  pay-roll 
and  the  labor  values  recorded  on  the  cost  sheets.  As 
has  been  shown,  it  may  not  always  be  necessary  for  all 
men  to  hand  in  a  work  card,  because  their  duties  are 
simple  and  constant,  and  a  record  of  the  time  expended 
is  sufficient  to  evaluate  their  services  and  distribute 
their  cost.  As  a  general  principle,  however,  it  is  good 
policy  to  have  every  man  whose  name  is  on  the  weekly 
pay-roll  hand  in  a  work  card,  so  that  the  two  systems 
of  recording  time  will  exactly  balance. 

After  the  timekeeper  has  taken  the  data  for  the 
pay-roll,  the  work  cards  are  forwarded  to  the  cost 
keeper,  who  sorts  the  cards  by  order  numbers  and 
charges  up  on  the  cost  ledger  the  costs  on  each  card 
against  the  order  number  which  it  bears.  This  work 
is  greatly  facilitated  by  making  the  work  cards  of 
different  colors  so  that  they  can  be  sorted  rapidly. 
The  charges  made  to  the  several  order  numbers  are 
summarized  periodically  and  carried  forward  to  the 
general  ledger  in  condensed  form.  They  form  the 
basis  of  various  kinds  of  reports,  which  will  be  dis- 
cussed in  a  succeeding  chapter.  These  detail  and 
summarized  time  charges  contain  valuable  informa- 
tion that  can  be  compiled  and  compared  and  the  infor- 


90  COST  FINDING 

mation  thus  gained  may  be  of  great  benefit  to  the 
manufacturing  superintendent.  The  general  method 
of  analyzing  this  information  and  presenting  it  in  the 
form  of  reports  is  discussed  in  the  volume  on  "Plant 
Management."  The  methods  of  recording  time,  dis- 
cussed in  the  preceding  section,  are  comprehensive, 
and  applicable  even  in  very  complex  manufacturing. 
It  will  be  clear,  also,  that  as  the  enterprise  considered 
approaches  more  closely  the  continuous  type  of  manu- 
facturing, the  methods  for  recording  the  time  ex- 
pended become  correspondingly  simpler. 

7.  Other  items  of  labor  costs. — In  the  foregoing 
discussion  it  has  been  assumed  that  there  is  no  time 
lost  between  jobs  and  that  the  time  of  finishing  one 
job  is  the  time  of  beginning  another.  Such  close 
connection  is  not  always  made,  however,  and  if  much 
time  intervenes  between  jobs,  care  should  be  taken 
that  such  time  is  not  charged  against  production  or- 
ders, tho  this  actually  is  often  done;  in  fact,  such 
procedure  is  even  advocated  by  some  writers.  Cer- 
tainly such  loose  time  accounting  will  vitiate  any  sys- 
tem of  cost  accounting;  lost  time  of  this  nature  should 
be  charged  to  an  expense  account  provided  for  that 
purpose.  Other  items  of  lost  time,  such  as  time  paid 
for  without  return,  as  in  cases  of  accident,  temporary 
stopping  of  machinery,  etc.,  should  be  similarly 
handled.  A  careful  record  should  be  kept  of  these 
items  and  they  should  be  analyzed  with  a  view  to 
minimizing  such  losses.  Many  managers  would  be 
surprised  to  know  how  much  time  is  lost  in  this  man- 


EVALUATION  OF  LABOR  COSTS  91 

ner  simply  because  it  is  never  brought  before  them 
in  a  collected  form. 

It  might  be  said  in  passing  that  time  losses  be- 
tween jobs  can  be  greatly  lessened  by  planning  the 
work  in  advance,  a  procedure  that  is  entirely  in  keep- 
ing with  modern  ideas  of  management.  A  bricklayer 
cannot  lay  bricks  unless  he  has  them  at  hand.  Even 
when  the  workman  is  on  piecework,  and  is  the  ap- 
parent loser  thru  lost  time,  it  should  be  remembered 
that  the  factory  loses  by  any  reduction  in  output, 
since  profits  depend  on  quantity  produced,  as  much 
as  they  do  on  profits  per  piece.  Every  effort  should 
be  made,  therefore,  to  have  work  moved  from  opera- 
tion to  operation  promptly  and  quickly,  and  all  work, 
if  possible,  should  be  studied  in  advance,  to  insure  the 
best  and  most  direct  sequence  of  operations. 

It  should  be  noted,  also,  that  the  discussion  of  time- 
saving  applies  not  only  to  direct  labor  but  even  more 
particularly  to  indirect ,  labor.  As  will  be  shown 
later,  the  indirect  labor  may  be,  and  often  is,  a  large 
part  of  the  wage  cost.  The  time-saving  principles 
and  time-recording  methods  that  are  found  useful  in 
connection  with  the  man  at  the  machine,  will  also  be 
found  advantageous  in  connection  with  the  clerk  in  the 
office  or  the  helper  in  the  yard. 

REVIEW 

What  kind  of  work  card  would  you  lay  out  for  (1)  day  work; 
(2)  piecework;  (3)  premium  or  bonus  work? 

What  system  of  time  recording  would  you  adopt  in  a  factory 
employing  common  labor  of  a  low  mental  type? 


92  COST  FINDING 

What  do  you  understand  by  the  term  "job  ticket"? 
How  many  types  of  job  tickets  are  there,  and  what  are  the 
advantages  and  disadvantages  of  each  type? 

Of  what  importance  is  it  to  know  the  causes  of  idle  time? 
What  are  the  various  purposes  of  collected  time  cards? 


CHAPTER  VTI 

EXPENSE  OR  BURDEN 

1.  Character  of  expense. — It  was  shown  in  Chap- 
ter II  that  many  items  of  labor  and  material  that  are 
essential  to  the  operation  of  the  enterprise  cannot  be 
directly  connected  with  any  particular  piece  of  prod- 
uct. An  examination  of  Figure  2  (page  21),  and 
also  of  the  expense  accounts  listed  in  Section  1,  Chap- 
ter IV,  will  make  this  fact  clearer.  It  holds  true  of 
practically  all  enterprises  of  any  magnitude,  and  fol- 
lows directly  as  a  result  of  division  of  labor.  It  will 
be  remembered,  also  (see  Section  8,  Chapter  III), 
that  it  is  always  desirable  to  segregate  the  shop  costs 
from  the  selling  and  other  costs,  if  for  no  other  reason 
than  to  render  it  possible  to  hold  the  proper  individ- 
uals responsible  for  these  costs.  Under  the  general 
name  of  "factory  expense",  or  "burden",  is  included, 
therefore,  all  labor,  all  material,  and  all  other  items 
of  manufacturing  cost  that  cannot  be  charged  directly 
to  some  particular  piece  of  production.  It  will  be 
noted  that  while,  in  general,  all  such  material  and 
labor  are  of  the  indirect  kind,  certain  expense  material 
may  go  directly  into  the  product.  Thus,  nails, 
screws,  glue,  and  similar  items,  may  be  used  in  such 
small  quantities  on  each  piece  of  product  as  to  make 

93 


94  COST  FINDING 

direct  accounting  difficult,  if  not  impossible.  Items 
of  this  kind  are  therefore  carried  to  an  expense  ac- 
count and  distributed  with  other  expense  items. 

The  general  character  of  selling  expense  and  office, 
or  administrative,  expense  is  shown  in  Section  1, 
Chapter  IV,  and  it  should  again  be  carefully  noted 
that,  while  these  two  classes  of  expense  are  often  gath- 
ered up  under  the  one  head  "general  expense",  they 
are  essentially  independent  quantities.  In  fact,  if  the 
selling  expense  is  of  any  consequence  it  should  be  seg- 
regated. Moreover,  as  will  be  shown,  it  is  often  de- 
sirable, as  the  enterprise  increases  in  size,  to  subdivide 
shop,  administrative  and  selling  expense  so  as  to  hold 
each  department  of  these  activities  responsible  for  its 
own  just  share  of  the  expenditures. 

Many  items  of  expense  do  not  naturally  attach 
themselves  quantitatively  to  machines  or  processes, 
but  gather  like  clouds,  of  greater  or  less  density,  over 
the  entire  enterprise.  There  is  no  great  difficulty, 
as  has  been  shown,  in  finding  the  cost  of  the  direct 
labor  and  the  direct  material  that  enter  into  a  product. 
Nor  is  it  a  matter  of  great  difficulty  to  classify  the 
many  items  entering  into  the  expense  and  to  find  the 
total  amount  of  such  classes  for  any  given  length  of 
time.  The  charging  off  of  this  total  expense  over  the 
total  product  for  any  particular  period  of  time  pre- 
sents, also,  a  simple  problem.  But  it  is  exceedingly 
difficult,  except  in  very  simple  cases,  to  assign  to  each 
shop  order  its  own  share  of  expense  with  any  great  de- 
gree of  accuracy.     The  principal  problem  of  cost  find- 


EXPENSE  OR  BURDEN  95 

ing  is  so  to  assign  the  expense,  or  burden,  that  each 
article  shall  bear  its  own  share,  and  only  its  own  share. 
This  problem  may  be  made  a  little  clearer  by  a  fur- 
ther consideration  of  the  characteristics  of  expense. 

2.  Expense  fluctuation  with  volume  of  business. — 
An  examination  of  the  expense  items  of  any  enter- 
prise will  show  that  while  some  are  fairly  constant  in 
amount,  others  go  up  and  down  with  the  volume  of  the 
business,  tho  according  to  different  laws.  In  a  gen- 
eral way  the  items  that  are  constant  include  all  ex- 
pense incident  to  the  existence  of  the  enterprise,  irre- 
spective of  productive  operations.  Thus,  such  items 
as  rent,  taxes,  insurance,  depreciation  of  buildings, 
and  the  like,  do  not  vary  materially,  whether  the  en- 
terprise is  active  or  not ;  or,  if  they  do  vary,  the  change 
is  hkely  to  be  occasional  and  by  large  amounts. 
Otherwise,  they  remain  fairly  fixed  for  long  periods. 
Such  expense,  furthermore,  can  never  become  zero, 
no  matter  what  the  volume  of  business  may  be.  The 
salaries  of  permanent  officials  are  of  this  character 
and  are  not  affected,  in  general,  by  changes  in  the 
volume  of  business.  Depreciation,  it  should  be  noted, 
may  be  even  greater  when  the  factory  is  idle  than 
when  it  is  in  operation,  since  then  many  ordinary 
measures  for  preventing  depreciation  are  not  active. 

Other  items  of  expense,  on  the  other  hand,  are  af- 
fected quickly  by  changes  in  the  volume  of  business. 
Thus,  clerical  help,  indirect  labor  and  operating  sup- 
phes  are  directly  affected  by  such  changes,  moving 
up  and  down  as  the  volume  varies — tho  not,  as  a  rule^ 

XII— 8 


96  COST  FINDING 

in  direct  proportion  to  such  variations.  For  instance, 
it  requires  a  definite  minimum  amount  of  oil  to  lubri- 
cate the  shafting  of  a  factory,  whether  any  machines 
are  in  operation  or  not,  and  any  further  amount  of 
oil  that  may  be  necessary  is  obviously  dependent  upon 
the  volume  of  work  passing  thru  the  shop.  This  re- 
lation is  usually  so  complex  that  it  cannot  be  ex- 
pressed in  terms  of  any  fixed  factor  of  production. 
In  general,  however,  the  relation  between  the  amount 
of  oil  used  and  the  volume  of  output  may  be  expressed 
thus 

Q  =  K4-f  (v) 

where  q  =  the  quantity  of  oil,  k  =  a  constant,  and 
f  (v)  —  some  function  of  the  volume  of  work.  Many 
other  expense  items,  such  as  power,  light,  and  some 
kinds  of  indirect  labor,  are  of  this  general  character. 

It  is  important  to  notice,  however,  that  from  this 
it  is  clear  that  profits  do  not  vary  proportionally  with 
the  volume  of  business.  Half-volume  does  not  mean 
half -profits,  since  there  is  always  an  irreducible  min- 
imum of  expense;  and  if  this  irreducible  minimum  is 
high  compared  with  the  variable  expenses  due  to  the 
activities  of  the  business,  a  comparatively  small  de- 
crease in  business  may  eliminate  all  profits,  if  it  does 
not  actually  cause  a  deficit. 

3.  Variations  of  expense  due  to  time. — Expense, 
again,  may  vary  according  to  time.  Thus,  a  large 
amount  of  coal  may  be  purchased,  either  to  take  ad- 
vantage of  the  market,  or  to  provide  for  emergencies ; 


EXPENSE  OR  BURDEN  97 

but  the  use  of  this  coal  may  extend  over  weeks  or  even 
months.  The  demand  for  certain  kinds  of  expense 
material  may  vary  with  the  season.  Thus  more  coal 
is  needed  in  the  winter  season,  while  ice  is  needed  par- 
ticularly in  the  summer.  Extensive  repairs  may  be 
made  to  buildings  or  machinery  because  of  the  wear 
and  tear  incident  to  the  work  of  previous  weeks  or 
months.  These  and  similar  expenses  may  fluctuate 
greatly  and  with  little  reference  to  the  volume  of  busi- 
ness. Yet,  clearly,  it  would  not  be  fair  to  current  pro- 
duction to  charge  off  such  heavy  expenses  against  it, 
thus  unduly  favoring  either  future  or  past  production. 
Such  expenses  must  be  averaged  over  a  reasonable 
period  of  time,  even  tho  the  method  of  fixing  such  an 
average  may  be  more  or  less  arbitrary.  Of  course, 
when  the  products  of  the  factory  are  seasonable — 
that  is,  when  some  kinds  are  made  only  in  the  winter, 
and  other  kinds  only  in  the  summer-p-there  may  be  ex- 
penses that  can  be  allocated  justly  on  a  seasonable 
basis,  but  this  case  is  uncommon. 

Expense  must  often  be  charged  off  by  an  average 
rate,  for  still  other  reasons.  Once  a  month  is  about 
as  often  as  it  is  convenient  or  desirable  to  close  the 
general  books  and  summarize  all  accounts,  direct  and 
indirect.  If  it  were  possible  to  start  each  job  on  the 
first  day  of  the  month  and  finish  it  on  the  last  day,  it 
would  be  possible  to  allocate  to  each  job,  with  fair 
accuracy,  a  proper  and  fair  share  of  the  total  monthly 
expense.  Such  conditions,  as  a  matter  of  fact,  are 
never  found,  since  all  work  must  be  started  and  fin- 


98  COST  FINDING 

ished  regardless  of  the  day  of  the  month.  Expense 
must,  therefore,  be  allocated  on  the  basis  of  summar- 
ized expense  costs  of  the  past  month,  or  months,  the 
data  for  the  current  month  not  usually  being  avail- 
able. 

Some  cost  accountants  prefer  to  use  the  expense 
data  of  the  preceding  month  only,  on  the  ground 
that  conditions  do  not  change  from  one  month  to  the 
next  as  much  as  they  do  during  a  period  of  several 
months.  If  this  is  done,  however,  special  attention 
must  be  paid  to  large  periodic  expenses  which  are 
properly  chargeable  over  a  considerable  period  of 
time.  This  difficulty  of  determining  with  accuracy 
the  expense  items  that  have  been  incurred  during  the 
time  a  particular  piece  of  work  has  been  in  process  of 
production,  and  the  expenses  which  are  logically  an  in- 
tegral part  of  the  cost  of  producing  that  work,  shcruld 
be  carefully  considered,  for  the  problem  that  it  pre- 
sents irtvolves  factors  that  prevent  any  cost  system 
from  being  very  accurate. 

4.  Expense  variation  with  character  and  size  of 
work. — The  amount  of  expense  which  any  part  should 
bear  will  also  vary  with  the  character  of  the  opera- 
tions performed  upon  it.  Thus,  in  a  plant  manufac- 
turing electrical  appliances  some  parts  must  be 
dipped  in  insulating  material  and  perhaps  baked. 
Other  parts  will  not  require  such  treatment  and, 
clearly,  they  should  not,  to  be  exact,  bear  any  of  the 
expense  of  the  insulating  department.  In  factories 
producing  different  lines  and  involving  both  intermit- 


EXPENSE  OR  BURDEN  99 

tent  and  continuous  manufacturing  processes,  such 
conditions  are  often  met,  and  they  sometimes  offer 
a  difficult  problem  in  cost  finding. 

The  amount  of  burden  that  a  part  is  justly  en- 
titled to  bear  may  vary  also  with  its  size  or  weight. 
Strictly  speaking,  small  parts  should  not  bear  any 
part  of  the  expense  due  to  crane  service  and  large 
equipment  in  general.  Theoretically  at  least,  a  large 
casting  should  bear  a  greater  share  of  the  repairs  to 
the  cupola  than  should  be  charged  against  a  small 
one. 

This  problem  is  a  difficult  one  in  factories  produc- 
ing lines  of  goods  that  have  a  large  range  in  size, 
where  competition  is  carried  on  with  other  factories 
each  one  of  which  produces  only  a  small  part  of  the 
range.  Other  things  being  equal,  a  factory  produc- 
ing a  full  line  of  electric  motors  ranging  from  one- 
quarter  horsepower  to  5,000  horsepower  would  have 
difficulty  in  competing  with  a  company  producing 
motors  from  one-quarter  horsepower  to  ten  horse- 
power, unless  special  care  were  taken  to  prevent  the 
larger  costs  due  to  the  larger  product  from  being  un- 
justly charged  against  the  smaller  product  that  does 
not  require  the  larger  equipment  for  its  production. 
To  differentiate  such  charges  is,  however,  often  a 
difficult  matter,  but  the  difficulty  can  be  lessened  by 
careful  departmentization  which  will  bring  parts  of 
like  kind  and  equal  size  under  the  same  departmental 
organization. 

5.  Clerical  and  selling  expenses, — These  problems 


100  COST  FINDING 

and  difficulties  are  common  to  office  and  shop  alike. 
Clerical  work  is,  in  general,  difficult  of  exact  alloca- 
tion, particularly  where  the  product  is  varied  and 
complex.  It  may,  and  usually  does,  involve  more 
expense  to  do  the  clerical  work  connected  with  mak- 
ing a  small,  complicated  machine  than  it  does  to  take 
care  of  the  clerical  work  connected  with  a  much  larger 
and  costlier  product.  This  is  particularly  true  where 
costs  are  required  in  detail,  since,  in  that  case,  the 
number  of  production  orders  may  be  very  great  for 
the  small,  complex  machine  as  compared  with  the 
large,  simple  machine.  For  the  same  reasons,  the 
cost  of  superintending  the  production  of  the  small 
machine  and  of  collecting  the  labor  and  material 
costs  may  be  excessive  as  compared  with  the  case  of 
the  large  machine. 

What  is  true  of  the  factory  office  is  obviously  true 
also  of  the  general  office  and  the  sales  office,  the  ex- 
penses of  these  last  departments  being  particularly 
vague,  so  far  as  allocation  to  any  one  job  is  concerned. 
The  cost,  for  instance,  of  doing  the  business  connected 
with  selling  standard  product,  which  is  well-estab-^ 
lished  in  the  market  and  practically  sells  itself,  is 
much  less  in  proportion  than  that  involved  in  selling 
special  sizes  or  types  or  in  disposing  of  product  for 
which  a  field  must  be  created.  Yet,  practically,  it  is 
often  difficult  to  segregate  these  expenses.  This  is 
markedly  true  of  the  work  of  the  salesman,  who  fre- 
quently labors  in  vain,  or  whose  reward  comes  in  the 


EXPENSE  OR  BURDEN  101 

form  of  sales  for  which  the  "missionary"  work  was 
performed  a  long  time  in  advance. 

6.  Two  purposes  of  expense  distribution. — Aside 
from  the  general  characteristics  of  expense  which 
have  just  heen  discussed,  each  item  of  expense  has 
special  characteristics  that  must  be  considered  in  con- 
nection with  its  distribution  against  production.  Cer- 
tain expenses,  such  as  fuel,  oil  and  certain  kinds  of 
indirect  labor,  are  clearly  chargeable  against  manu- 
facturing expense,  while  other  items  are  just  as  clearly 
chargeable  against  general  expense  or  selling  ex- 
pense. In  segregating  and  classifying  expense  it 
should  be  remembered  that  the  object  in  view  is  two- 
fold: 

(a)  To  allocate  each  item  as  fairly  and  as  accu- 
rately as  is  possible  or  desirable. 

(b)  To  record  and  summarize  each  class  of  expense 
in  such  detail  as  will  make  possible  its  analysis  and 
clearly  show  its  content. 

The  first  requirement  involves  a  consideration  of 
methods  of  distributing  expense,  which  will  be  dis- 
cussed in  Chapter  X;  while  the  second  requirement 
governs  the  detail  in  which  any  item  of  expense  shall 
be  collected  and  recorded.  This  last  requirement 
will  now  be  considered  briefly. 

7.  Classifying  expense  factors. — As  noted  in  Sec- 
tion 8,  Chapter  III,  clear-cut  distinction  should  be 
made,  if  possible,  between  manufacturing  expense  and 
general  expense.     This  is  necessary,  if  for  no  other 


102  COST  FINDING 

reason  than  to  fix  responsibility  for  suqh  expenditures. 
The  manufacturing  superintendent  should  be  held 
strictly  responsible  for  the  expenses  that  are  a  legiti- 
mate part  of  production,  and  for  those  expenses  only. 
The  general  manager  should  assume  responsibility  for 
the  general  expenses  which  are  incurred  by  the  man- 
aging and  accounting  branches  of  the  business.  In 
small  enterprises  the  sales  expenses  are  often  included 
in  the  general  expense,  but  usually  it  is  considered 
better  to  collect  the  sales  expenses  separately,  so  as 
to  be  able  to  hold  the  sales  manager  responsible  for 
his  own  expenditures.  When  this  responsibility  has 
been  determined,  however,  there  is  no  gain  in  keeping 
these  expenses  separated,  and  for  convenience  they 
are  generally  merged  and  distributed  against  the 
product  as  one  expense. 

It  is  not  always  possible  to  make  an  absolute  divi- 
sion of  expense  between  these  two  classes,  because 
the  organizations  of  industrial  enterprises  differ  so 
widely.  Thus  the  president  may  also  be  the  sales 
manager,  and  the  duties  of  other  officials  may  include 
supervision  of  the  manufacturing  and  general  activi- 
ties of  the  business.  However,  even  in  such  cases 
a  proportional  division  of  their  salaries  can  always 
be  made  that  will  be  equitable  to  all  concerned. 

In  Figure  12,  opposite,  is  shown  a  classified  analy- 
sis of  the  cost  of  production,  including  selling  costs, 
as  it  occurs  in  an  average  manufacturing  plant. 
Only  typical  items  are  shown,  since  the  detail  in  which 
it  is  necessary  or  desirable  to  take  account  of  expense 


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Figure  12. 


DisisiBUTiox  OF  Production  and  Selling  Costs 
103 


104.  COST  FINDING 

depends  entirely  upon  the  industry  and  the  size  of  the 
enterprise;  one  very  large  factory  in  this  country  has 
no  less  than  130  expense  accounts.  As  the  size  of 
an  enterprise  increases,  all  items  of  expense  assume 
greater  importance  and  segregation  becomes  mor©  and 
more  imperative.  Each  factory  expense  account 
should  be  designated  by  some  number  or  symbol 
similar  to  those  used  for  production  accounts,  as  ex- 
plained in  Chapter  IV,  and  no  charge  should  be  made 
against  any  account  unless  it  is  authorized  by  a 
written  order  from  the  proper  official.  The  classifica- 
tion given  in  Figure  12  is  in  general  accord  with  the 
practice  of  skilled  accountants  and  cost  keepers.  To 
distribute  logically  the  great  majority  of  these  ac- 
counts among  manufacturing  expense,  general  office 
expense  and  selling  expense,  is  not,  as  a  rule,  difficult 
in  any  particular  case;  but  there  are  a  few  items  on 
which  all  cost  keepers  and  accountants  are  not  agreed, 
concerning  which  more  detailed  discussion  may  be 
helpful.  These  are  rent,  interest,  taxes,  insurance, 
defective  material  and  spoiled  work,  lost  time,  en- 
gineering and  development,  repairs  and  improve- 
ments, patterns,  drawings  and  small  tools,  and  de- 
preciation. 

8.  Theoretical  consideration  of  interest  and  rent. — 
To  the  accountant  rent  and  interest  are  identical, 
since  rent  is  money  paid  to  a  capitalist  for  the  use 
of  buildings  or  equipment,  while  interest  is  money 
paid  for  the  use  of  capital.  There  is  a  considerable 
difference  of  opinion,  however,  among  accountants 


EXPENSE  OR  BURDEN  105 

and  cost-finding  experts  as  to  the  way  in  which  these 
items  should  be  cared  for  in  the  accounts.  Some 
authorities  would  not  include  either  of  them  in  the 
details  of  factory  costs  but  would  add  them  to  the 
total  factory  costs,  carrj^ing  the  transaction  in  the 
general  ledger.  Others  would  include  all  such  items 
in  the  factory  costs  as  a  true  part  of  the  cost  of  pro- 
duction. Some  would  include  rent  but  not  interest 
as  a  part  of  factory  costs,  but  this  view  is  not  reason- 
able, considering  the  similarity  of  the  two  items. 

The  argument  advanced  by  those  who  would  ex- 
clude rent  and  interest  from  factory  cost  is  that  these 
items  being  attributes  of  capital  are  in  the  nature  of 
a  division  of  profits,  and  should  therefore  be  accounted 
for  by  deducting  them  from  profits.  The  argument 
is  also  advanced  that  the  manner  in  which  the  capital 
is  obtained  can  in  no  way  affect  the  actual  cost  of 
manufacture.  It  is  urged  that  the  manufacturer  may 
provide  all  of  the  capital,  or  that  he  may  borrow  a 
part  of  it  from  others,  dividing  a  part  of  the  profits 
of  the  enterprise  with  these  other  capitalists,  in  the 
form  of  rent  or  interest,  but  that  no  part  of  these 
items  is  a  logical  part  of  the  costs. 

Now,  it  is  true  that  to  the  man  who  lends  facilities 
or  money,  rent  and  interest  are  in  the  nature  of  profit, 
but  to  the  manufacturer  who  has  borrowed  these 
facilities  or  money,  rent  and  interest  are  simply  debts 
that  must  be  paid  before  he  can  obtain  a  profit.  So 
far  as  simply  securing  this  profit  is  concerned,  it  makes 
no  real  difference  to  him  whether  these  items  are  dis- 


106  COST  FINDING 

tributed  in  the  costs  or  are  added  to  the  costs  before 
fixing  the  selhng  price.  If  the  clerical  work  is  ac- 
curately done  the  result  will  be  exactly  the  same  in 
either  case. 

9.  Practical  consideration  of  interest  and  rent. — 
It  should  be  remembered,  however,  that  the  purpose 
of  cost  finding  is  not  to  decide  theoretical  points  in 
economics,  but  to  allocate  all  expenditures  so  that  the 
cost  of  each  article  shall  be  segregated  as  far  as  pos- 
sible, and  so  that  it  will  be  possible  to  tell  which  lines 
of  production  are  paying  and  which  are  not.  If,  now, 
the  manufacturer  is  producing  his  goods  with  bor- 
rowed money,  on  machinery  of  varying  value,  housed 
in  buildings  of  varying  cost,  it  is  obvious  that,  unless 
rent  and  interest  are  distributed  against  the  product 
in  proportion  to  the  use  made  of  the  facilities  of  the 
plant,  he  can  form  no  definite  idea  as  to  the  compara- 
tive profit-earning  values  of  his  several  lines  of  prod- 
uct. There  is  just  the  same  reason,  in  fact,  for  dis- 
tinguishing, in  these  matters,  between  different  de- 
partments or  machines  of  the  same  factory,  as  there 
is  in  distinguishing  between  different  factories  owned 
by  the  same  man,  tho  he  may  have  borrowed  from  the 
same  source  all  the  money  with  which  to  erect  his  dif- 
ferent factories.  In  the  case  of  a  simple  continuous 
industry  it  is  not  necessary,  of  course,  to  distinguish 
so  finely  in  these  matters,  since  each  unit  of  product 
bears  the  same  amount  of  each  kind  of  expense. 

It  will  be  noted,  however,  that  when  money  is  bor- 
rowed for  commercial  purposes,  and  not  for  invest- 


EXPENSE  OR  BURDEN  107 

ment,  or  use  in  manufacturing  facilities,  the  status  of 
interest  paid  upon  such  indebtedness  is  different. 
Thus,  if  the  commercial  department  borrows  money 
so  as  to  be  able  to  extend  credit  to  customers  whose 
accounts  are  due,  or  if  money  is  borrowed  at  a  low 
rate  to  discount  purchase  invoices  at  a  higher  rate, 
such  interest  and  discounts  have  no  relation  to  the 
cost  of  production,  but  belong  to  the  general,  or  sales, 
accounts  and  should  be  considered  accordingly. 

10.  Interest  on  owned  capital. — The  case  where  the 
manufacturer  owns  his  plant  would  seem,  at  first 
sight,  to  be  somewhat  different ;  for  here,  apparently, 
he  does  not  need  to  include  interest  charges  on  his 
investment,  in  computing  either  his  factory  cost  or 
his  total  cost.  A  brief  reflection,  however,  will  sj^ow 
that  the  case  referred  to  is  only  seemingly  different. 
If  the  owner  of  an  enterprise  cannot  make  a  profit 
over  and  above  interest  charges  on  his  investment,  it 
would  be  easier  for  him  to  lend  his  money  to  some 
other  person,  who  would  pay  him  such  interest  and 
assume  all  the  risks  and  responsibilities  of  the  business. 
The  owner  could  then  work  for  some  one  else  and  earn 
a  salary.  These  facts  would  seem  to  indicate  that  the 
salary  of  an  operating  owner  should  also  be  considered 
a  part  of  the  cost  of  production  and  should  not  come 
out  of  profits.  It  is  clear,  of  course,  that  the  manu- 
facturer who  owns  his  plants  has  a  great  advantage 
over  one  who  rents  his  plant,  since  the  latter  must 
make  a  minimum  profit  to  meet  his  interest  charges, 
while  the  former  is  not  necessarily  in  any  danger,  even' 


108  COST  FINDING 

tho  his  investment  does  not  pay  him  the  market  rates 
of  interest.  From  the  standpoint  of  practical  cost 
finding  it  would  seem  clear  that  a  reasonable  allow- 
ance for  interest  on  the  investment  should  be  dis- 
tributed in  the  factory  costs,  if  for  no  other  purpose 
than  to  deteraiine  the  comparative  profit-earning  ca- 
pacity of  the  several  lines  of  output. 

This  general  principle  was  approved  by  a  com- 
mittee on  uniform  cost  accounting  of  the  National 
Machine  Tool  Builders'  Association,  which  recom- 
mended that  interest  at  the  rate  of  at  least  five  per 
cent  on  the  investment  be  distributed  in  the  burden, 
where  the  manufacturer  owns  his  own  plant.  This 
committee  recommended  also  that  where  the  manu- 
facturer rented  his  facilities,  or  borrowed  his  capital, 
the  rent  and  interest  should  be  included  in  the  factory 
costs,  in  accordance  with  the  arguments  presented  in 
Section  9  of  this  chapter. 

These  views,  as  before  noted,  are  not  held  by  all 
cost  experts  and  accountants.  Tho  the  practice  of 
including  interest  and  rent  in  costs  is  now  common, 
it  is  argued  that  the  inclusion  of  these  items  in  the 
factory  costs  may  raise  the  total  costs  above  the 
market  price,  and  that  it  is  better  to  defer  such  charges 
till  the  end  of  the  year,  or  such  other  period  when  the 
general  books  are  closed,  and  then  to  make  whatever 
allowance  is  desirable.  In  reply  to  this  argument  it 
may  be  said  that  costs  are  costs,  and  that  it  is  far 
better  and  safer  to  determine  them  as  accurately  as 
possible,  and  then,  if  they  cannot  meet  the  market 


EXPENSE    OR    BURDEN  109 

prices,  proceed  to  reduce  them  by  economies,  or  better 
methods,  till  the  desired  margin  is  secured.  A  care- 
ful comparison  of  the  earnings  of  each  tool  with  the 
interest  on  the  investment  involved,  would  often  lead 
to  the  discarding  of  the  tool,  a  change  in  the  product, 
or  a  higher  charge  for  the  services  of  the  tool.  A 
fuller  discussion  of  this  subject  with  the  arguments 
for  and  against  the  position  here  taken  will  be  found 
in  the  Modern  Business  Text  on  "Financial  and  Busi- 
ness Statements." 

REVTEW 

How  will  the  individual  items  of  expense  burden  shown  in 
Figure  12  vary  on  account  of  the  following  factors:  Volume? 
Time?    Character  and  size  of  work  done? 

Why  should  interest  on  owned  capital  be  charged  as  a  part  of 
manufacturing  expense?     ^Vhat  rate  would  you  select? 

What  is  the  purpose  of  expense  distribution? 

Is  rent  properly  included  as  an  item  of  manufacturing  ex- 
pense?    Give  reasons. 


CHAPTER  VIII 

EXPENSE  OR  BURDEN   (Continued) 

1.  Taxes  and  insurance. — These  arguments  regard- 
ing interest  and  rent  are  applicable  as  well,  in  their 
entirety,  to  taxes  and  insurance,  which  are  also  some- 
times considered  as  attributes  of  capital,  and  are 
therefore  included  in  the  general  costs.  Accurately 
proportional  allocation  of  costs  requires  that  they  also 
be  distributed  in  the  manufacturing  expense.  This 
proportional  allocation  should  take  account  not  only 
of  the  varying  value  of  buildings  and  equipment,  but 
also,  in  cases  where  the  material  is  costly,  of  the  value 
of  the  material  in  process  in  each  department. 

Taxes  and  insurance  are  excellent  examples  of 
periodic  expenses  which  really  are  chargeable  over 
the  product  turned  out  during  the  particular  period 
covered  by  the  payment.  These  items,  being  usually 
paid  in  advance,  are  most  logically  cared  for  by  carry- 
ing them  to  a  "suspense  account"  from  which  they  can 
be  charged  off  monthly  into  the  costs.  Other  expense 
items,  such  as  coal,  for  example,  can  be  conveniently 
handled  in  a  similar  manner. 

2.  Defective  material  and  spoiled  work. — It  would 
seem  logical,  at  first  sight,  to  charge  the  cost  of  de- 
fective castings  and  spoiled  work  to  the  order  number 

110 


EXPENSE  OR  BURDEN  111 

of  the  job  in  which  these  occur.  Where  the  defective 
or  spoiled  part  is  one  of  a  verj^  large  lot  this  pro- 
cedure would  be  proper ;  or  if  the  work  is  so  unusually 
difficult  that  bad  castings  or  defective  workmanship 
are  likely  to  occur  to  a  greater  extent  than  in  the  ordi- 
nary run  of  work,  it  is  clear  that  the  extra  cost  so  in- 
curred should  be  charged  to  the  product  or  class  of 
work  concerned,  since  it  is,  in  general,  a  more  costly 
line  of  goods  to  produce. 

The  cost  of  an  occasional  bad  casting  or  a  spoiled 
part  should  not,  however,  be  charged  against  the  par- 
ticular job  in  which  it  occurs.  Such  items  of  cost 
should  be  carried  to  a  separate  account  (see  Figure 
12,  page  103) ,  and  charged  off  in  the  manufacturing 
expense,  for  thus  it  will  be  possible  to  distribute  these 
losses  as  a  light  tax  over  the  entire  product.  If  the 
cost  of  occasional  misfortunes  is  charged  to  the  indi- 
vidual jobs  in  which  they  occur,  some  jobs  will  be 
penalized  to  such  a  degree  as  to  raise  their  cost  out 
of  all  proportion,  and  it  will  be  practically  impossible 
to  determine  what  the  true  cost  should  be.  Clearly, 
also,  all  such  costs  should  be  entered  in  the  records  as 
separate  items,  so  that  no  confusion  may  arise  in  esti- 
mating upon  new  work,  in  which  such  occasional  losses 
may  not  occur.  All  such  losses  should  be  reported  on 
a  special  form,  and  should  also  come  under  the  eye 
of  the  superintendent.  The  report  should  give  full 
information  regarding  the  defective  material  or  the 
spoiled  work,  the  names  of  all  men  concerned,  the 
reason  for  the  loss,  etc.     Furthermore,  the  total  of  the 

XII— 9 


112  COST  FINDING 

account  to  which  these  items  are  carried  should  be 
carefully  scanned,  since  it  is  an  index  of  the  efficiency 
of  certain  phases  of  production. 

Defective  purchased  material  should,  of  course,  be 
carried  in  a  separate  account,  if  for  no  other  reason 
than  to  fix  responsibility  for  the  entailed  losses. 
Such  losses,  however,  are  also  manufacturing  ex- 
penses and  should  be  distributed  accordingly. 

3.  Lost  time. — In  every  enterprise  there  is  usually 
a  considerable  amount  of  time  for  which  payment  is 
made  but  for  which  no  return  is  received  in  productive 
effort.  Thus,  there  may  be  considerable  time  lost  by 
the  stopping  of  machinery  for  short  spaces  of  time, 
temporary  extinguishment  of  the  lights,  cleaning  of 
machinery,  and  in  waiting  for  material,  tools  or  in- 
formation. It  is  clear  that,  in  general,  such  costs 
should  not  be  allocated  to  particular  jobs,  if  the  cost 
records  are  to  serve  as  a  means  of  predicting  future 
performance.  Furthermore,  lost  time,  like  spoiled 
work,  is  a  measure  of  efficiency  in  management. 
Much  of  the  lost  time  in  the  majority  of  plants  could 
be  saved  by  careful  planning  of  the  work  and  care- 
ful examination  and  repair  of  machinery  in  advance. 
The  general  principle  of  planning  work  and  repairs 
in  advance  is  one  of  the  cardinal  principles  of  modern 
industrial  engineering,  and  is  well  worth  the  con- 
sideration of  all  managers.  (See  also  Section  7, 
Chapter  VI.) 

Lost  time,  like  spoiled  work,  should  be  carried  to  a 
separate  account  (see  Figure  12)  and  distributed  in 


EXPENSE  OR  BURDEN  113 

the  expense.  This  also  gives  the  management  an  op- 
portmiity  to  check  up  the  total  of  such  time  losses 
and  to  exercise  supervision  over  it  in  a  manner  not 
attainable  if  such  losses  are  buried  in  the  job  costs. 
4.  Engineering  and  development. — In  many  enter- 
prises there  are  certain  expenditures  the  distribution 
of  which  will  vary  with  conditions.  Engineering  and 
similar  work,  for  instance,  may  be  for  one  of  three 
purposes: 

(1)  For  securing  specific  contracts 

(2)  For  specific  contracts  already  secured 

(3)  For  the  production  of  standard  product,  either 
for  orders  on  hand,  or  to  be  received. 

Engineering  and  other  preliminary  work  performed 
for  the  express  purpose  of  securing  contracts  is 
purely  commercial  in  character  and  should  be  charged 
to  selling  expense.  Work  of  this  kind  may  include 
designs,  blue-prints  and  estimates  of  considerable  cost. 
Clearly,  the  manufacturing  department  should  not 
bear  an  expense  of  this  nature,  often  very  heavy,  with 
which  it  is  in  no  way  concerned. 

Should  the  contract  be  secured,  and  should  the  pre- 
liminary work  be  used  in  the  actual  construction,  the 
cost  of  the  preliminary  work  may  be  divided  between 
selling  expense  and  manufacturing  expense;  or,  in 
some  cases,  it  may  justifiably  be  charged  entirely  to 
manufacturing.  This  should  never  be  done,  however, 
if  the  contract  for  which  the  preliminary  work  was 
done  is  not  secured.  In  that  case  it  is  a  selling  ex- 
pense, pure  and  simple,  and  if  entered  in  the  selling 


114  COST  FINDING 

expenses  it  has  some  significance;  on  the  other  hand, 
it  is  not  only  poor  accounting  to  charge  such  pre- 
liminary work  to  manufacturing  expense,  but  it  is 
poor  management,  generally,  because  such  procedure 
results  in  general  confusion  in  the  manufacturing- 
expense  accounts. 

In  the  case  of  specific  contracts  for  products  which 
are  not  likely  to  be  built  a  second  time,  it  is  obvious 
that,  as  far  as  possible,  all  cost  pertaining  to  the  prod- 
uct should  be  charged  against  it.  All  engineering, 
and  all  special  experimental  work,  special  tools,  etc., 
then  become  direct  costs  of  production,  chargeable 
against  the  work  with  which  they  are  connected. 
Some  manufacturers  consider  all  drawings  and  pat- 
terns as  assets  and  charge  their  value  to  capital  ac- 
count. In  the  case  of  special  contracts  which  are 
not  likely  to  be  repeated  such  a  procedure  is  seldom 
justifiable.  It  is  better  and  safer  to  charge  all  ex- 
penditures made  on  special  product  to  the  cost  of  that 
product  if  any  doubt  exists  regarding  the  special 
facilittes   so  provided   being  used  elsewhere. 

Engineering  and  development  work  done  on  stand- 
ard product  which  is  passing  thru  the  factory  in  quan- 
tity is  of  a  different  character  and  cannot  be  allocated 
to  jobs;  it  must  be  treated  as  manufacturing  expense. 
It  is,  of  course,  often  possible  to  segregate  such  ex- 
penses where  they  are  incurred  for  specific  lines  of 
product,  and  charge  them  off  against  those  particular 
lines;  but  in  complex  cases  even  this  may  be  diffi- 
cult.    Thus,  experimental  work  conducted  to  perfect 


EXPENSE  OR  BURDEN  115 

the  theory  of  the  design  of  electric  transformers  would 
be  applicable  to  all  sizes  of  transformers  but  not 
applicable  to  electric  generators.  Yet  it  would  be 
difficult  in  a  medium-sized  shop  to  allocate  this  ex- 
pense solely  to  transformers,  and  it  would  be  still 
more  difficult  to  make  each  size  of  transformers  bear 
its  proportional  share  of  this  burden. 

Engineering  and  experimental  work  that  has  for 
its  purpose  the  development  of  better  manufacturing 
methods  is  clearly  also  a  manufacturing  expense;  but 
similar  work  conducted  for  the  development  of  new 
lines  of  product  is  somewhat  different  in  character. 
Clearly,  also,  such  work  is  not  chargeable  to  selling 
expense.  A  good  way  of  handling  expenditures  for 
new  development  is  to  carry  them  to  a  development, 
or  suspense,  account  until  it  is  decided  whether  or  not 
the  line  of  product  under  consideration  will  be  built. 
If  it  is  decided  to  produce  the  line  of  goods  this 
preliminar}"  expense  can  be  charged  off  against  the 
line  over  an  estimated  quantity  of  product.  Such 
a  method  of  distribution  must,  of  course,  be  approxi- 
mate, but,  nevertheless,  it  is  much  more  accurate  than 
charging  such  expense  to  other  lines  of, product.  If 
this  method  is  not  feasible  or  desirable,  the  develop- 
ment account  must  be  closed  into  the  factory  ex- 
pense and  distributed  by  whatever  method  is  in  use. 
If  it  is  decided  not  to  manufacture  the  line  of  goods, 
the  development  cost  should  be  charged  off  in  the 
general  expense.  In  any  case,  great  care  should  be 
exercised  in  carrying  development  work  as  an  asset. 


116  COST    FINDING 

as  is  sometimes  done.  If  so  treated,  and  if  the  asset 
be  at  all  of  a  perishable  character — whether  drawings, 
machines  or  engineering  data — the  development  cost 
should  be  depreciated  as  rapidly  as  possible  by  charg- 
ing into  current  costs. 

5.  Patterns,  drawings  and  small  tools. — The  prob- 
lem of  patterns  and  drawings  is  very  similar,  in  some 
respects,  to  that  of  engineering  and  experimental 
work.  It  is  the  practice  of  some  manufacturers  to 
carry  patterns  and  drawings  as  an  asset,  when  they 
are  used  continuously  in  production.  Great  care 
should  be  taken  in  doing  this.  At  best,  patterns  are 
short-lived  when  used;  if  not  used  they  soon  become 
valueless.  Any  one  who  has  ever  critically  examined 
an  old  pattern  storage  knows  how  useless  are  most 
of  the  patterns  found  in  such  places.  Wherever  pat- 
terns or  drawings  are  made  for  specific  jobs,  and  are 
not  likely  to  be  used  elsewhere,  they  should  undoubt- 
edly be  charged  directly  to  production.  Where  pat- 
terns are  used  continuously  on  standard  production 
they  can  be  charged  off,  pro  rata,  over  an  estimated 
amount  of  production.  Iron  patterns,  while  they  are 
more  durable  than  patterns  made  of  wood,  and  while 
they  possess  some  residual  value  after  they  are  worn 
out,  should  be  paid  for  out  of  production  as  quickly 
as  possible ;  for,  tho  they  may  be  valuable  to  the  en- 
terprise while  it  is  a  "going  concern",  their  value  as 
an  asset  at  a  forced  sale  would  be  very  small. 

Drawings,  tho  undoubtedly  a  true  asset  while  in 
use  in  a  "going  concern",  are  of  little  market  value 


EXPENSE  OR  BURDEN  117 

and  should,  in  any  case,  be  carried  at  a  very  low  valua- 
tion. It  is  better  to  charge  off  such  investments  by 
averaging  them  over  an  assumed  quantity  of  prod- 
uct. Thus,  pattern  costs  are  often  absorbed  as  a 
charge  on  foundry  cost,  and  drawings  can  be  absorbed 
in  the  manner  suggested  in  the  preceding  paragraph. 

Short-lived,  small,  loose  equipment,  in  general,  and 
hand  tools  which  wear  out  rapidly,  should  either  ho 
carried  at  a  very  low  valuation  or  be  renewed  out  of 
revenue  and  charged  off  as  an  expense. 

6.  Special  apparatus. — In  many  manufacturing 
plants  very  large  sums  of  money  are  tied  up  in  jigs, 
fixtures  and  special  tools.  The  problem  of  the  ex- 
tent to  which  it  is  justifiable  to  make  such  special  tools 
is  an  interesting  one,  often  involving  other  factors 
besides  the  element  of  cost,  as,  for  instance,  accuracy 
of  form.  Generally  speaking,  however,  the  making 
of  special  machinery  should  be  justifiable  from  the 
standpoint  of  cost  of  production,  but  great  care  should 
be  used  in  disposing  of  the  cost  of  such  tools.  Special 
tools  are,  most  often,  applicable  only  to  the  work  for 
which  they  are  made,  and,  if  the  line  of  goods  for 
which  they  are  used  should  be  discontinued,  or  if  the 
enterprise  should  go  out  of  business,  the  value  of  such 
equipment  is  always  problematic  and  in  many  cases 
such  material  is  worthless  except  as  scrap.  In  the 
case  of  small  equipment,  such  as  jigs  and  drilling  fix- 
tures, it  is  an  unwise  policy  to  carry  their  value  as  an 
asset.  Such  value  should  be  considered  as  a  part  of 
the  cost  of  production  of  the  particular  line  of  goods 


118  COST  FINDING 

for  which  the  tools  have  been  made,  and  that  value 
should  be  distributed  over  the  cost  of  such  goods. 
This  usually  involves  the  creation  of  a  development, 
or  suspense,  account  covering  the  original  cost  of  such 
tools,  and  an  estimate  of  the  probable  number  of  parts 
to  be  manufactured,  to  fully  absorb  this  account. 

In  the  case  of  large,  special  machines  it  may  be 
desirable  to  consider  them  as  a  real  asset.  But,  again, 
careful  judgment  should  be  exercised  in  such  a  pro- 
ceeding. Unless  it  is  clear  that  such  tools  are  likely 
to  outlive  their  usefulness  by  the  natural  processes 
of  wear  and  tear,  rather  than  by  obsolescence,  they 
should  be  liberally  depreciated  at  inventory  time,  to 
a  point  where  their  loss  would  not  be  a  serious  factor. 
To  any  one  familiar  with  the  collection  of  old  spe- 
cial tools  to  be  found  in  any  factory  operating  on 
mass  production,  the  wisdom  of  such  procedure  will 
be  obvious.  It  is  essential,  therefore,  either  to  bury 
the  cost  of  special  tools  in  the  cost  of  production, 
or  to  see  to  it  that  the  tools  are  depreciated  to  a  value 
that  will  permit  of  safely  carrying  them  as  an  asset. 
There  is  no  doubt  that  the  neglect  of  the  above  prin- 
ciples lies  at  the  root  of  many  industrial  failures. 

7.  Improvements  and  repairs. — A  careful  distinc- 
tion should  be  made  between  improvements  and  re- 
pairs. Any  addition  which  adds  to  the  earning  capac- 
ity is  obviously  an  asset  and  should  be  so  considered. 
But  even  here  it  is  good  policy  to  limit  the  minimum 
value  of  the  improvements  which  are  treated  as  assets, 
since  it  is  always  desirable  that  charges  to  capital 


EXPENSE  OR  BURDEN  119 

should  consist  of  important  items  the  value  of  which, 
as  assets,  cannot  be  questioned.  This  minimum  limit 
will,  of  course,  vary  with  the  size  and  the  character 
of  the  enterprise;  in  small  shops  it  is  perhaps  as  low 
as  fifty  dollars.  Any  betterments  of  lesser  value 
should  be  treated  as  repairs  and  carried  to  the  ex- 
pense account. 

When  a  machine,  or  other  piece  of  apparatus,  is 
rebuilt  or  has  extensive  improvements  made  upon  it, 
the  changes  may  sometimes  be  such  as  will  add  ma- 
terially to  the  producing  or  earning  capacity  of  the 
apparatus;  they  may  constitute  a  true  betterment  that 
may  be  added  to  the  assets.  Thus,  a  machine  may  be 
thoroly  repaired  and,  at  the  same  time,  equipped  with 
a  motor  drive.  Care  should  be  exercised  to  make  cer- 
tain in  each  case  that  the  producing  capacity  has  really 
been  raised  before  the  inventory  value  of  the  machine 
is  actually  increased. 

Repairs  of  all  kinds  are  in  the  nature  of  expense. 
They  are  also  closely  connected  with  depreciation, 
which  is  discussed  in  Chapter  IX.  The  detail  in 
which  repair  costs  should  be  collected  and  recorded 
will,  of  course,  vary  with  the  enterprise ;  but  there  are 
certain  broad  classifications  that  are  fundamental  and 
general,  as,  for  instance,  repairs  to  buildings,  repairs 
to  machinery,  repairs  to  small  tools  and  loose  plant, 
and  repairs  to  furniture  and  miscellaneous  fixtures 
(see  Figure  12,  page  103).  Each  of  these  general 
divisions  may  be,  and  usually  is,  subdivided  into 
smaller  accounts,  the  detail  often  being  minute  in 


120  COST  FINDING 

large  plants.  In  any  case,  the  detail  should  be  such 
that  the  responsibility  of  departments  and  foremen  is 
clearly  shown.  This  is  usually  accomplished,  as  be- 
fore noted,  by  a  system  of  standing-order  numbers 
(Section  5,  Chapter  VI)  to  which  labor  and  material 
are  charged  in  the  same  manner  as  in  the  case  of  pro- 
ductive work. 

8.  Inclusion  of  burden  in  cost  of  repairs. — It  is 
customary  in  many  establishments  to  consider  the  ma- 
terial and  labor  actually  used  in  making  repairs  as 
constituting  the  full  cost  of  such  repairs,  and  no  addi- 
tion is  made  thereto  for  other  expenses  as  in  the  case 
of  a  product  made  for  the  market.  This  procedure, 
however,  may  in  some  cases  be  open  to  question.  If 
repairs  are  made  on  a  building,  for  instance,  with 
material  and  labor  bought  directly  for  the  work,  it 
would  be  reasonable  to  charge  any  expense  for  super- 
vision, purchasing  costs,  etc.,  to  the  cost  of  the  re- 
pairs, but  since  no  use  is  made  of  the  machinery  and 
equipment  in  making  these  repairs  no  other  expense 
should  be  included  in  their  cost.  There  are,  no  doubt, 
many  repairs  made  on  the  equipment  where  the  labor 
of  the  repair  man  and  the  supplies  needed  are  the 
only  expenses  involved.  But  where  much  supervi- 
sion is  needed  and  extensive  use  is  made  of  machinery 
and  floor  space  to  make  repairs  on  equipment,  it  seems 
reasonable  that  such  work  should  bear  its  own  share 
of  burden  just  as  tho  the  work  were  being  performed 
for  a  customer. 

Repairs  and  replacements  may  be  the  accumulated 


EXPENSE  OR  BURDEN  121 

results  of  ordinary  wear  and  tear,  or  they  may  be 
necessary  because  of  breakage  thru  carelessness  or 
the  overloading  of  apparatus.  They  are,  therefore, 
variable  in  amount  and  should  be  averaged  over  a 
considerable  period  of  time.  Clearly,  it  is  not  logical 
to  charge  the  entire  cost  of  putting  a  new  roof  on  a 
building  to  the  particular  work  passing  thru  at  that 
time ;  nor  is  it  reasonable  to  charge  the  cupola  repairs 
to  the  castings  made  immediately  after  these  repairs 
are  made.  In  some  plants  it  is  customary  to  charge 
the  cost  of  minor  breakages  to  the  job  by  which  the 
breakage  was  occasioned.  This  is  not  a  good  cost- 
finding  policy  for  even  small  items.  All  such  costs 
should  go  into  the  manufacturing  expense  and  be  dis- 
tributed over  the  product. 

9.  Plant  ledger, — Besides  locating  repair  and  main- 
tenance costs  by  departments,  an  individual  account 
should  be  kept  with  each  building  and  machine  and 
each  group  or  class  of  apparatus  the  components  of 
which  are  too  small  to  list  in  individual  accounts. 
Such  a  record  is  called  a  plant  ledger.  It  is  most 
conveniently  formed  by  the  card-index  method  as  il- 
lustrated in  Figure  13.  A  card  is  made  out  for 
each  building  or  machine,  and  on  this  are  recorded 
all  repairs  and  all  charges  to  the  piece  of  apparatus. 
Such  a  card,  in  connection  with  the  proper  deprecia- 
tion of  the  asset,  gives  a  life  history,  and  is  a  con- 
tinuous inventory,  of  the  asset.  The  entire  plant 
ledger,  therefore,  constitutes  a  continuous  inventory 
of  the  equipment  and,  in  conjunction  with  the  stores 


122 


COST  FINDING 


ledger,  the  cost  ledger  and  the  stock  ledger,  forms  a 
complete  continuous  inventory  of  all  the  material 
assets. 


PLANT   LEDGER                               NO.-^ 

MACHINE  /f'k  l-i  ^£c!tAjij 

LOCATION:  FLOOR    /              ROW    ^ 

MAKER  (J^-ajAyz^'^KmLu^e^.  ^<X<nrt  t&j>. 

OUR  NO.    '^-ff             MAKERS  NO.  ZJ^ 

PURCHASED  ^^mQxJ>'rdu^  St,.f,fu£y  Co, 

PURCHASE  PRICE      fS/Sbo 

DATE  OF  PURCHASE     /7.-6-Zf 

ESTIMATED  LIFE         Z6' '-:j,e^a^>L^ 

NEW  OR  SECOND  HAND     'HjiJUJ' 

■  PROBABLE  SELLING  VALUE  ^  300 

WEIGHT      So2.o                     POUNDS 

RATE  OF  DEPRECIATION                 7^ 

DEPRECIATED  VALUE  AT  END  OF  YEAR                                            1 

n 

/V2.7 

ss 

PLANT-LEDGER  CARD  (FRONT) 


REPAIRS,  ADDITIONS  AND  ALTERATIONS 
AFFECTING  DEPRECIATION 

COST  OF  INSTALLATION 

DESCRIPTION 

ORDER 

DATE 

CREDIT 

DEBIT 

FHEIGHT  AND  CARTAGE    ,    $  :bS' 

3^rf 

u-s-n.1 

35 

o< 

FOUNDATION       $2^.^,4)0 

INSTALLATION         $  ^6^3.  O 

' — ' 

L- 

^ 

, X___ 1__ 1 1 

PLANT-LEDGER  CARD  (REVLERSE  SJDE) 

FiGUEE    13. 


As  before  noted,  only  repair  items  which  affect 
productive  capacity  are  carried  to  the  plant  ledger. 


EXPENSE  OR  BURDEN  123 

All  others  are  charged  off  directly  to  expense.  Small 
perishable  tools,  such  as  saw  blades,  scrapers,  and  files, 
are  usually  not  included  in  small  tool  accounts,  but 
are  carried  under  expense  supplies.  It  is  a  good 
policy,  however,  to  keep  account  of  the  amount  of 
these  perishable  tools  and  supplies  issued  to  each 
workman,  as  well  as  a  record  of  all  breakage  of  small 
tools  and  equipment.  In  addition  to  the  informa- 
tion thus  obtained  concerning  the  destructive  procliv- 
ities of  the  individual  workers,  the  very  fact  that  a 
record  of  breakage  is  maintained  tends  to  make  the 
men  more  careful  of  costly  equipment. 

10.  Sundry  expenses. — In  manufacturing  estab- 
lishments, particularly,  there  are  many  items  of  ex- 
pense which  are  neither  labor  nor  material,  and  which 
are  not  large  enough  to  warrant  the  opening  of  sepa- 
rate accounts  in  the  ledger.  The  number  and  amount 
of  such  items  will  naturally  vary  with  the  enterprise 
and  its  magnitude.  Thus,  gas  and  telephone  serv- 
ice, which  are  examples  of  these  items,  may  be  of 
importance  in  a  large  works,  but  neither  one  may  war- 
rant segregation  in  a  small  plant.  It  is  customary  to 
group  all  such  small  items  into  a  so-called  sundries 
expense  account.  Care  must  be  taken,  however,  that 
such  accounts  do  not  become  dumping  grounds  for 
all  sorts  of  unauthorized  expenditures.  All  items 
entering  into  such  an  account  should  be  properly 
authorized  and  vouched  for,  and  no  item  should  be 
entered  therein  that  should  logically  go  into  any  other 
account.     Many  such  items  will  appear  in  the  form 


124  COST  FINDING 

of  bills  payable  from  outside  creditors,  but  all  internal 
expenditures  of  this  kind  should  be  made  on  written 
authorization,  and  recorded  and  paid  for  only  when 
properly  vouched  for. 

11.  Character  of  general  expense. — It  has  been 
shown  that  general  expense  is  logically  divided  into 
administrative  expense  and  selling  expense,  tho  in 
small  enterprises  this  distinction  is  not  always  made. 
As  enterprises  grow  in  magnitude,  however,  this  di- 
vision becomes  more  important  and  these  expenses 
should  be  carefully  separated  so  that  the  heads  of  the 
departments  concerned  may  be  held  responsible  for 
their  proper  shares.  In  some  cases  where  certain  of- 
ficials have  duties  that  lie  in  both  fields  this  may  mean 
a  more  or  less  arbitrary  division  of  their  salaries,  but 
even  such  an  arbitrary  division  is  better  than  none  at 
all. 

The  character  and  classification  of  the  expense  items 
making  up  administrative  and  selling  expense  require 
little  explanation.  The  classification  shown  in  Figure 
12  (page  103)  is  in  accordance  with  common  prac- 
tice. The  detail  into  which  these  expenses  may  be 
divided  will,  of  course,  vary  with  the  enterprise. 
What  may  be  a  small  item  in  one  case  may  be  a  very 
large  one  in  another.  The  majority  of  these  general 
expenses  will  appear  as  bills  or  vouchers,  tho  there 
may  be  many  items  for  which  production  orders  may 
be  issued  and  the  costs  carried  to  the  cost  ledger,  and 
thence  to  the  general  accounts. 

12.  Cost  of  welfare  work. — The  above  methods  can, 


EXPENSE  OR  BURDEN  126 

in  general,  be  used  to  account  for  all  labor,  both  di- 
rect and  indirect.  The  direct  and  the  indirect  labor 
expended  in  the  actual  production  of  goods  may  not, 
however,  constitute  the  entire  cost  of  compensation 
for  labor  employed.  In  many  shops  and  factories 
large  sums  of  money  are  expended  to  make  the  sur- 
roundings of  the  workmen  more  pleasant  and  com- 
fortable. Such  items  of  expense  as  may  go  into  pro- 
viding superior  lighting  and  sanitary  equipment  can, 
of  course,  be  justified  on  the  ground  that  workmen 
turn  out  more  and  better  product  in  pleasant  sur- 
roundings than  they  do  under  the  cheerless  condi- 
tions common  a  few  years  ago;  and  the  interest 
charges  on  such  expenditures  may  justly  be  consid- 
ered as  a  manufacturing  expense. 

But  there  are  other  branches  of  so-called  welfare 
work  which  are  concerned  with  the  development  of 
the  workman  along  broad  lines  of  general  culture, 
and  of  which  provision  for  general  study  and  social 
betterment  is  a  good  example.  Even  tho  these  ef- 
forts may  be  justifiable,  viewing  the  enterprise  as  a 
whole,  the  distribution  of  such  expenditures  should  be 
carefully  considered.  It  would  not  be  wise,  for  in- 
stance, to  charge  the  cost  of  free  midday  lunches, 
general  reading  rooms,  summer  excursions,  and  the 
like,  to  shop  expense,  if  the  manufacturing  superin- 
tendent could  not  see  that  such  things  really  do  assist 
production.  This  is  particularly  true  since  many  of 
the  most  ambitious  efforts  along  these  lines  have  ended 
in   disastrous   failure.     Where   any   question   arises 


126  COST  FINDING 

about  the  distribution  of  such  expenditures  it  may  be 
more  expedient  to  carry  them  to  general  expense  and 
hold  the  general  manager,  and  not  the  factory  man- 
ager, responsible  for  them. 

REVIEW 

Under  what  theory  is  it  proper  to  charge  taxes  and  insurance 
to  expense  burden? 

What  plan  would  you  devise  for  handling  the  loss  due  to  de- 
fective material? 

How  should  engineering  and  development  expense  be  distrib- 
uted in  cost  accounting? 

What  is  the  asset  value  of  patterns,  drawings  and  small  tools? 

If  the  fulfilment  of  a  contract  required  the  purchase  and  in- 
stallation of  an  expensive  special  machine,  how  should  the  cost 
thereof  be  treated  in  the  accounts  ? 

What  is  the  correct  basis  for  the  distribution  of  the  cost  of  re- 
pairs and  improvements?     Have  these  expenses  any  asset  value? 


CHAPTER  IX 

DEPRECIATION  ^ 

1.  General  theory. — In  all  industrial  enterprises 
there  are  some  assets  which  are  fairly  stable  in  char- 
acter and  which  either  do  not  change  in  value,  or,  if 
they  change,  do  so  only  by  degrees.  Thus,  the  pur- 
chasing power  of  cash  may  increase  or  decrease  but 
in  either  case  it  will  do  so  slowly.  The  value  of  real 
estate  may  increase  or  depreciate  but  this  change  will 
also  be  comparatively  slow  in  most  cases.  There  are 
other  forms  of  assets,  however,  that  constantly  tend 
to  depreciate  in  value,  and  this  depreciation  may  be 
very  rapid.  For  example,  buildings  waste  away  by 
reason  of  the  action  of  the  elements,  as  well  as  by  the 
normal  wear  and  tear  that  they  undergo.  Machinery, 
tools  and  furniture  also  wear  out  and  must  be  re- 
placed. Materials  and  supplies,  worked  and  un- 
worked,  may  depreciate  to  scrap  value,  either  from 
the  action  of  the  elements  or  as  a  result  of  becoming 
obsolete  thru  changes  in  the  art. 

Such  losses  must  be  compensated  for  if  the  busi- 
ness is  to  continue  and  make  profits.  The  subject  of 
depreciation  has,  therefore,  steadily  assumed  greater 

1  See  also  discussion  of  "Depreciation"  in  the  Modern  Business  Text 
on  "Accounting  Principles." 

127 

xn— 10 


128  COST  FINDING 

and  greater  importance.  Altho  in  the  past  purely  a 
matter  of  private  interest,  it  has  now  become  a  decided 
factor  in  the  regulation  of  public  utility  corpora- 
tions, and  in  other  legal  procedure.  Anything  ap- 
proaching a  comprehensive  discussion  of  this  subject 
is  far  beyond  our  present  scope;  therefore,  only 
enough  will  be  included  to  indicate  its  place  in  cost- 
finding  practice. 

2.  Capital  account  and  revenue  account. — A  care- 
ful distinction  should  be  made  between  losses  on  capi- 
tal account  and  losses  on  revenue  account.  If  an  un- 
insured building  is  burned,  or  if  an  uninsured  vessel 
is  lost  at  sea,  the  loss  so  sustained  is  a  loss  of  capital 
which  is  in  no  way  connected  with  depreciation.  No 
allowance  which  the  owner  can  make  for  wasting  de- 
preciation of  other  assets  can  properly  be  used  to  re- 
place the  building  or  the  vessel.  Such  replacement 
should  come  out  of  new  capital,  whether  it  be  taken 
from  savings  or  borrowed  elsewhere. 

Suppose,  however,  that  a  company  begins  business 
with  $500,000  and,  at  the  end  of  a  given  period  of 
time,  finds  that  after  having  made  allowance  for  wast- 
ing losses,  and  having  suffered  no  losses  on  capital 
account,  its  assets  are  worth  only  $400,000.  The  com- 
pany is  said,  then,  to  have  suffered  a  loss  of  $100,000 
on  revenue  or  trading  account.  Depreciation  is  one 
of  the  factors  that  enter  into,  and  greatly  affect, 
loss  or  gain  on  revenue  account.  For,  if  the  natural 
wasting  losses  on  buildings  and  machinery  are  not  pro- 
yided  for  in  the  costs,  and,  as  a  consequence  the  bal- 


DEPRECIATION  129 

ance  sheet  shows  a  deficit  when  such  losses  are  pro- 
vided for,  the  enterprise  has  suffered  a  loss  in  revenue 
account  because  of  this  procedure.  Wasting  losses 
of  this  kind  are  a  just  charge  against  production  and, 
as  will  be  seen,  should  be  included  in  manufacturing 
expenses. 

3.  Forms  of  depreciation,  wear  and  tear. — The  de- 
tail in  which  cognizance  is  taken  of  depreciation  will 
vary  widely  with  the  enterprise.  Thus,  in  the  ap- 
praisal of  public  utilities  where  toll  rates  are  to  be 
fixed  upon  the  basis  of  valuation,  the  following  forms 
of  lessening  value  are  often  recognized: 

(1)  Wear  and  tear,  or  maintenance 

(2)  Phj^sical  decay,  or  decrepitude 

(3)  Deferred  maintenance,  or  neglect 

(4)  Inadequacy 

(5)  Obsolescence. 

In  simpler  cases  less  detail  is  necessary  and  these 
items  are  then  grouped  under  two  or  three  heads. 

Under  wear  and  tear  is  included  the  ordinary  wast- 
ing away  as  a  result  of  use  and  the  action  of  the  ele- 
ments. All  machines  tend  to  wear  out,  the  paint 
on  buildings  wears  away,  fences  constantly  break 
down,  etc.  All  such  wasting  losses  that  can  be  com- 
pensated for  by  ordinary  running  repairs  and  re- 
newals are  classed  under  wear  and  tear.  Under  this 
head  also  may  be  included  the  results  of  accidents 
or  sudden  damage  from  unpreventable  causes.  The 
rate  at  which  such  wasting  progresses  will  manifestly 
vary  quite  widely  with  the  asset  and  the  service.     In 


130  COST  FINDING 

some  classes  of  assets  the  fall  in  value  may  be  very 
rapid  in  the  beginning  of  service,  slowing  up  as  time 
goes  on;  while  in  other  cases  the  reverse  may  occur, 
the  rate  of  depreciation  becoming  greater  as  the  asset 
nears  the  end  of  its  usefulness. 

4.  Physical  decay,  neglect. — Many  assets,  such  as 
buildings  and  machinery,  even  tho  kept  in  the  best  of 
repair,  will  in  time  reach  a  state  where  repairs  will  no 
longer  suffice  and  the  entire  asset  must  be  renewed. 
A  horse  is  a  striking  example  of  this  form  of  asset. 
His  shoes  may  be  replaced,  but  no  repairs  or  renewals 
can  stay  the  gradual  breaking  down  of  his  physical 
powers.  In  time  he  must  be  replaced.  Deprecia- 
tion of  this  kind  is  called  physical  decay,  or  decrepi- 
tude. It  should  be  noted  that  depreciation  because 
of  age  takes  place  whether  the  asset  is  in  use  or  not. 
Thus  buildings,  boilers,  insulation,  etc.,  may  waste 
away  more  rapidly  when  standing  idle  than  when 
they  are  in  use,  and  it  is  common  experience  that  all 
properties,  even  when  kept  in  good  repair,  eventually 
reach  a  physical  state  where  repairs  and  detail  renew- 
als are  no  longer  sufficient,  and  the  asset  must  be  re- 
placed entirely. 

In  refined  methods  of  appraisal,  account  is  taken 
of  the  value  of  an  asset,  as  it  really  exists,  and  the 
value  it  would  have  if  properly  repaired.  Even  when 
a  plant  is  kept  in  the  best  of  repair,  it  has  been  shown 
that  its  value  must  steadily  decrease.  If,  however, 
repairs  and  renewals  are  neglected,  the  value  of  the 
asset  will  necessarily  fall  below  what  it  would  be  if 


DEPRECIATION  131 

kept  in  repair,  and  the  amount  it  falls  is  called  de- 
ferred maintenance,  or  neglect.  Since  deferred  main- 
tenance represents  the  amount  that  must  be  expended 
to  restore  the  asset  to  normal  condition,  it  is  also  a 
measure  of  the  efficiency  with  which  the  plant  has  been 
managed,  so  far,  at  least,  as  its  physical  care  is  con- 
cerned. 

5.  Inadequacy  and  obsolescence. — Sometimes  an 
asset  must  be  replaced  even  tho  it  is  in  the  best  of 
repair,  because  it  is  no  longer  adequate  for  the  work 
at  hand.  Thus,  a  steam  crane  may  become  too  small 
for  a  growing  industry,  tho  it  may  still  be  in  good  con- 
dition ;  or  an  engine  may  prove  to  be  unable  to  drive  a 
factory  that  has  outgrown  it,  tho  it  may  be  as  efficient 
as  when  it  was  installed.  Such  decreased  value  is 
known  as  inadequacy,  or  supersession,  and,  obviously, 
has  no  connection  with  wear  and  tear  in  the  ordinary 
sense,  nor  is  it  connected  with  decrepitude,  or  decay 
thru  old  age. 

An  asset  may  become  of  less  value  because  of  the 
introduction  of  new  methods  or  machines.  This  may 
occur  when  the  asset  in  question  is  as  good  as  new,  so 
far  as  its  power  of  production  is  concerned;  yet  the 
manufacturer  cannot  afford  to  be  without  the  im- 
proved apparatus.  This  phase  of  the  problem  of  de- 
preciation is  particularly  noticeable  in  industries  that 
are  developing  rapidly.  During  the  early  days  of 
the  growth  of  the  electrical  industry  changes  of  this 
kind  were  many  and  rapid.  The  same  difficulty  was 
experienced  in  New  England  during  the  development 


132  COST  FINDING 

of  the  textile  industry.  Such  lessening  of  value  is 
called  obsolescence;  it  is  one  of  the  wasting  losses 
which  is  often  most  difficult  to  foresee  and  make  pro- 
vision for.  Special  machinery  is  particularly  liable 
to  become  obsolescent.  A  factory  manager  should 
exercise  careful  judgment  in  purchasing,  therefore, 
in  order  that  he  may  not  be  left,  at  some  future  time, 
with  a  useless  machine  on  his  hands. 

In  appraising  public  utilities  or  in  settling  the  dif- 
ferences of  opinion  between  partners  or  stockholders 
and  bondholders  all  of  the  above  classes  of  wasting 
losses  may  be,  and  are,  taken  into  account.  It  is  not 
difficult  to  see,  also,  that  sharp  differences  of  opinion 
may  arise  between  owners  as  to  the  exact  disposition 
of  these  losses.  But  for  the  ordinary  enterprise, 
where  the  owner  is  desirous  of  knowing  only  the  total 
of  such  losses,  it  is  usual  to  group  them  all  under  two 
heads,  namely,  depreciation  and  obsolescence — depre- 
ciation including  wear  and  tear,  decrepitude  and  ne- 
glect, and  obsolescence  including  inadequacy  also. 

6.  Relation  between  depreciation  and  repairs. — It 
will  be  clear  that  repairs  and  renewals  tend  to  com- 
pensate for  wasting  losses,  but  from  the  foregoing  it 
is  also  clear  that  in  most  cases  complete  compensation 
for  depreciation,  by  means  of  repairs,  is  not  possible. 
In  large  plants,  consisting  of  many  units  that  wear 
put  so  quickly  as  to  need  frequent  and  complete  re- 
newals, such  compensation  is  sometimes  possible. 
'For  example,  in  pottery  works,  where  the  kilns  must 
be  frequently  rebuilt,  it  is  conceivable  that  if  there 


DEPRECIATION  133 

are  enough  kilns  the  renewals  may  practically  balance 
depreciation.  In  the  case  of  large  railways,  where  re- 
newals and  additions  are  constantly  being  made,  it  is 
often  considered  that  depreciation  is  thus  compensated 
for.  But  it  is  evident  that  in  such  cases  there  should 
be  an  obvious  increase  in  the  productive  capacity  of 
the  plant  to  insure  against  gradual  lessening  of  the 
assets.  Even  when  a  machine  or  building  is  kept  in 
good  repair  there  is  necessarily,  as  already  noted,  a 
lessening  of  its  productive  power  that  cannot  be 
stayed  by  repairs  and  renewals. 

On  the  other  hand,  extensive  repairs  and  renewals 
may  be  made  on  an  asset,  which  may  be  considered  as 
increasing  its  earning  value  and  hence  increasing  its 
inventory  value.  Thus  a  machine  may  have  a  depre- 
ciated value  of  $5,000,  when  extensive  repairs  and  re- 
newals amounting  to  $1,000  may  be  expended  upon 
it.  If  the  producing  power  of  the  tool  is  thus  in- 
creased it  would  be  allowable  to  increase  the  value  of 
the  machine  to,  say,  $5,500  and  make  such  an  entry  on 
the  plant  ledger.  But  as  already  noted,  it  should  be 
very  clear  that  the  earning  capacity  has  been  aug- 
mented before  the  inventory  value  is  raised ;  otherwise, 
the  cost  of  the  repairs  should  be  carried  to  the  manu- 
facturing expense  account. 

7.  Relation  between  depreciation  and  capital. — It 
api^ears  from  the  foregoing  discussion  that  if  the 
capital  invested  is  to  be  maintained,  the  wasting  losses 
due  to  depreciation  must  be  carefully  and  systemati- 
cally compensated  for.     Now  there  is  only  one  source 


134.  COST  FINDING 

from  which  these  losses  can  be  compensated  for, 
namely,  revenue  from  output.  It  is  a  fundamental 
principle,  therefore,  that  no  profits  shoidd  be  con- 
sidered until  all  losses  to  capital  thru  depreciation 
have  been  replaced  from  earnings. 

This  principle  is  very  clear  when  applied  to  such 
enterprises  as  are  limited  in  time,  as,  for  instance,  a 
mine.  In  such  a  case  the  investment  is  represented 
by  the  cost  of  the  land  acquired,  the  cost  of  sinking 
the  shaft  and  running  the  tunnels,  the  cost  of  the  ma- 
chinery and  equipment,  with  such  cash,  etc.,  as  may  be 
necessary  to  carry  on  the  operations.  When  the  ore 
is  extracted  the  land  may  be  valueless,  and  the  ma- 
chinery, even  tho  in  good  repair,  may  be  equally  value- 
less, because  of  its  special  character  and  the  place 
where  it  is  located.  Obviously,  the  operator  should 
sell  his  ore  at  a  rate  that  will  return  to  him  his  origi- 
nal investment,  plus  the  cost  of  operation  and  plus 
such  a  profit  as  he  can  obtain  on  the  venture.  Clearly, 
he  cannot  say  that  he  has  made  a  profit  until  he  has 
recovered  his  original  investment  and  paid  for  all  op- 
erating expenses. 

One  important  feature  of  depreciation  in  its  rela- 
tion to  capital  is  its  elusive  character.  The  general 
books  of  any  concern  usually  give  minute  details  re- 
garding the  changes  in  cash,  accounts  receivable  and 
material  in  process,  but  the  wasting  changes  that  take 
place  in  buildings  and  equipment  are  seldom  accu- 
rately known.  Furthermore,  as  will  be  shown,  they 
are  particularly  difficult  to  evaluate,  since,  unlike 


DEPRECIATION  135 

changes  in  cash  and  other  current  assets,  they  do  not 
force  themselves  upon  the  attention  of  the  account- 
ant. 

The  very  elusrveness  of  depreciation  often  gives 
rise  to  wide  differences  of  opinion  in  cases  where  the 
enterprise  is  owned  by  several  parties,  and  especially 
when  both  bondholders  and  stockholders  are  inter- 
ested. The  bondholder  who  is  assured  of  a  return 
on  his  investment  very  naturally  will  insist  that  the 
plant  be  kept  in  good  repair,  since  that  is  necessary 
to  insure  the  permanency  of  his  capital.  The  stock- 
holder, free  to  sell  his  stock  at  any  time,  is  more  in- 
terested in  dividends,  and  may  not  object  if  profits 
are  paid  out  of  capital  because  of  insufficient  attention 
to  depreciation.  The  problem,  therefore,  of  dealing 
fairly  with  the  bondholders  who  are  the  creditors  and 
with  the  stockholders  who  should  have  a  fair  return  on 
the  stock,  is  intimately  connected  with  depreciation. 

8.  Onginal,  present  and  scrap  values. — It  may  be 
noted  in  passing  that  the  value  of  any  asset  will  vary 
with  the  purpose  for  which  the  valuation  is  made. 
There  is  a  great  difference  between  the  value  of  a 
plant  viewed  as  a  "going  concern",  and  its  value  at 
forced  sale.  In  appraising  public  utilities,  for  in- 
stance, several  kinds  of  value  are  recognized.  Thus 
the  "service  value",  or  the  value  as  measured  by  the 
effectiveness  of  the  asset  at  that  particular  time,  may 
be  considered  important,  since  this  value  may  be  high, 
tho  the  asset  itself  may  be  old  or  depreciated.  Again, 
the  value  of  "cost  of  reproduction",  or  the  value  as 


136  COST    FINDING 

measured  by  the  cost  of  replacing  the  asset  with  new 
apparatus  of  equal  effectiveness,  is  often  an  impor- 
tant consideration  in  the  appraisal  of  public  utilities. 
In  the  usual  factory  inventory,  however,  the  "original 
cost,"  "residual"  or  "scrap"  value  and  the  "present 
value,"  are  the  most  important  values  with  which  the 
factory  manager  and  the  cost  keeper  are  concerned.^ 

The  original  cost  is  the  cost  of  the  asset  plus  freight 
and  cartage,  excluding  foundation  and  erection  costs, 
since  these  are  irrecoverable  and  should  be  included 
in  preliminary  expense  and  written  off  independently. 
Some  accountants  include  erection  costs  in  the  origi- 
nal value,  on  the  ground  that  they  are  not  expenses 
properly  chargeable  to  the  current  period,  and  that 
depreciation  charges  will  eventually  dispose  of  them. 
This  view,  it  would  seem,  loses  sight  of  the  fact  that 
the  assets  are  thereby  unduly  inflated. 

While  it  is  true  that  such  charges  are,  strictly 
speaking,  a  part  of  the  investment,  they  are  of  such 
an  evanescent  character  that  they  should  be  recovered 
as  soon  as  possible.  A  machine  does  not  change  in 
value  if  moved  to  a  new  location,  but  the  value  of  the 
outlay,  incident  to  its  erection  on  the  original  site, 
vanishes  the  instant  that  it  is  moved ;  while  the  founda- 
tion, instead  of  being  of  value  is,  in  many  cases,  such 
as  to  render  removal  or  remodeling  difficult  and  ex- 
pensive. Depreciation  has  to  do  with  a  different  kind 
of  lessening  value,  and  it  is  much  better  to  carry  erec- 
tion and  foundation  expenses  to  a  suspense-develop- 

1  See  also  the  Text  on  "Financial  and  Business  Statements." 


DEPRECIATION  137 

ment  account  and  write  them  off  as  quickly  as  pos- 
sible. 

The  "residual"  or  "scrap"  value  of  an  asset  is  its 
estimated  market  value  at  the  end  of  the  probable 
producing  life. 

The  "present  value"  of  an  asset  is  the  value  found 
by  subtracting  the  total  depreciation,  to  date,  from 
the  original  cost,  due  allowance  being  made  for  any  re- 
newals that  have  been  carried  to  the  plant-ledger  ac- 
count of  the  asset. 

The  foregoing  discussion  deals  with  assets  that  are 
"tangible"  or  "visible"  but,  in  addition  to  such  assets, 
there  are  often  others  tliat  are  "intangible"  or  "in- 
visible." In  this  class  would  be  included  the  cost  of 
preliminary  surveys,  legal  expenses  of  organization, 
cost  of  franchises  and  patents,  and  other  short-lived 
assets.  Many  of  these  may  constitute  a  true  part  of 
the  cost  of  the  plant  or  be  indispensable  to  its  opera- 
tion, but  while  extremely  valuable  to  the  enterprise  as 
a  "going  concern",  their  actual  market  value  may  be 
verj'-  small.  Best  practice,  therefore,  carries  all  such 
assets  to  "development  accounts",  making  provision 
for  depreciating  such  accounts  out  of  existence  by 
means  of  a  reserve  fund.  Such  methods  will  be  de- 
scribed in  a  later  section. 

9.  Determination  of  depreciation. — All  intelligent 
managers  admit  the  necessity  of  making  allowance  for 
depreciation,  but  there  is  much  diversity  of  opinion 
regarding  the  methods  to  be  pursued  in  doing  so. 
One  of  the  reasons  for  this  diversity  of  opinion  is  that 


138  COST    FINDING 

enterprises  vary  widely,  and,  in  addition,  it  is  not  al- 
ways expedient  to  make  as  large  a  deduction  for  de- 
preciation as  may  seem  desirable.  An  old,  and  still 
common,  method  is  to  make  an  annual  visual  inven- 
tory of  every  asset,  the  total  value  so  obtained  being 
the  apparent  inventory  value  of  the  plant.  By  com- 
parison with  the  inventory  of  former  years  the  de- 
preciation is  determined  and  deducted  from  gross 
profit  before  dividends  are  declared.  While  such  a 
method  seems  practical  and  satisfactory  for  enter- 
prises which  close  their  books  annually  only,  it  has 
several  disadvantages,  and  there  are  objections  to  its 
use.  A  visual  examination  may  or  may  not  be  suf- 
ficient for  a  correct  valuation  of  the  assets,  and  such 
methods  of  valuation  require  judgment  backed  by 
long  practical  experience.  A  periodical  visual  ex- 
amination is,  however,  a  good  check  on  the  methods 
to  be  described,  for  such  a  visual  inventory  often 
brings  to  light  material  and  apparatus  that  have  de- 
preciated greatly  tho  appearing  on  the  plant  ledger 
or  the  stores  or  finished-product  ledger  at  full  cost. 

More  advanced  practice,  however,  provides^  for  a 
continuous  inventory  of  all  physical  assets,  and  makes 
further  provisions  for  definite  and  systematic  depreci- 
ation, as  indicated  on  the  plant-ledger  card  shown  in 
Figure  13  (page  122).  The  depreciation  so  deter- 
mined is  distributed  in  the  factory  expense  and  be- 
comes an  integral  part  of  the  cost  of  production. 

10.  General  method  of  depreciation. — In  laying 

1  See   Modern   Business   Text  on   "Plant   Management." 


DEPRECIATION  139 

out  a  systematic  plan  for  depreciating  any  asset  it 
will  be  necessary,  therefore,  to  know  the  original  cost 
of  the  asset,  the  estimated  productive  life  of  the  asset, 
and  the  probable  "scrap  value"  of  the  building  or  ma- 
chine at  the  end  of  this  productive  life.  Some  definite 
rate  of  depreciation  is  then  decided  upon  that  will  re- 
duce the  original  value  to  the  "scrap  value"  at  the 
end  of  the  life  period.  It  should  be  remembered  that 
repairs,  or  renewals,  or  obsolescence,  may  make  neces- 
sary some  modification  of  the  plan  laid  down,  and 
it  may  be  necessary,  as  circumstances  change,  to 
change  the  rate  of  depreciation. 

The  general  method  of  depreciating  an  asset  may 
be  illustrated  as  follows:  Suppose  an  asset  has  an 
original  value  of  $5,000  and  when  installed  its  esti- 
mated producing  life  is  set  at  twenty  years,  at  the  end 
of  which  period  it  is  estimated  that  its  "scrap  value" 
will  be  $500.  The  total  depreciation  which  must  be 
cared  for,  not  considering  modifying  repairs  or  re- 
newals, will  be,  therefore,  $5,000  —  $500  =  $4,500. 
Suppose,  now,  that  at  the  end  of  ten  years  the  book 
value  of  the  asset  has  been  reduced  by  the  method  of 
depreciation  in  use  to  $2,000,  and  at  that  time  the  asset 
receives  repairs  and  renewals  amounting  to  $1,000. 
If  such  renewals  bring  the  asset  up  to  somewhere  near 
the  producing  value  of  a  new  piece  of  apparatus  of 
similar  kind,  it  is  clearly  logical  to  increase  the  book 
value  to,  say,  $2,500  and  readjust  the  rate  of  depre- 
ciation, if  desirable.  On  the  other  hand,  at  the  end 
of  the  fifth  year,  the  asset  may  be  found  to  be  in  first- 


140  COST  FINDING 

class  repair,  but  almost  valueless  as  a  producing  asset, 
because  of  new  inventions,  or  changes  in  processes. 
Thus,  it  is  clear  that  the  "scrap  value"  and  the  pro- 
ducing life  depend  on  many  factors  and  must,  as  a 
rule,  be  estimated. 

There  are  several  methods  advocated,  and  in  use, 
for  fixing  the  rate  at  which  the  asset  shall  be  depre- 
ciated from  the  original  cost  to  "scrap  value."  This  is 
necessarily  so,  since  conditions  vary  and  personal 
opinions  govern  these  matters  to  a  large  degree.  The 
three  most  important  of  these  methods  to  be  discussed 
at  this  point  are  percentage  on  original  cost,  per- 
centage on  diminishing  value,  and  sinking  fund. 

11.  Percentage  on  original  cost. — Under  the  plan 
known  as  percentage  on  original  cost,  the  total  depre- 
ciation, or  the  difference  between  the  original  cost  and 
the  "scrap  value",  is  divided  by  the  estimated  pro- 
ducing life,  and  the  dividend  is  the  amount  set  aside 
annually  for  depreciation.  Thus,  in  the  preceding 
example  the  annual  depreciation  would  be  $225. 
Since  the  same  amount  is  deducted  annually  from  the 
value  of  the  asset  the  decline  in  value  is  uniform  and, 
hence,  follows  a  straight  line.  For  this  reason  this 
method  is  sometimes  designated  "straight  line"  de- 
preciation. 

This  method  of  depreciation  has  been  much  used 
because  of  its  simplicity  and  because  it  does  not  make 
such  a  heavy  reduction  in  inventory  values  in  the  be- 
ginning of  the  life  of  the  asset  as  does  the  method  of 
percentage  on  diminishing  value.     This  is  an  un- 


DEPRECIATION  141 

doubted  advantage  for  a  new  enterprise  that  has  a 
scanty  income  during  the  early  years  of  its  existence. 
On  the  other  hand,  it  is  undoubtedly  true  that,  with 
many  assets,  the  depreciation  is  much  greater  during 
the  early  years  of  use  than  during  the  later  years. 

12.  Percentage  on  diminishing  value. — It  is  also 
argued  against  the  straight-line  depreciation  method 
that  it  is  more  desirable  to  depreciate  heavilj^  dur- 
ing the  early  years,  when  repairs  and  renewals  are 
not  costly,  and  to  depreciate  less  heavily  during  the 
later  years,  when  repairs  begin  to  become  more  bur- 
densome. For  this  reason,  and  others,  some  man- 
agers prefer  the  method  of  percentage  on  diminishing 
value.  Under  this  system  a  definite  percentage  is 
taken  each  year  from  the  depreciated  value  of  the 
preceding  year.  Thus,  in  the  case  already  men- 
tioned, if  the  rate  of  depreciation  be  taken  at  10  per 
cent,  and  this  percentage  be  taken  annually  from  the 
depreciated  value  of  the  year  before,  the  same  results 
will  be  obtained  as  with  the  other  method.  It  will  be 
clear  that  under  this  last  method  the  depreciation  will 
be  much  heavier  during  the  early  years  and  much 
lighter  during  the  later  years,  for  the  same  producing 
life  and  "residual"  value  than  under  the  straight-line 
method.  The  computation  of  depreciation  by  per- 
centage on  diminishing  value  will  be  facilitated  by 
the  use  of  Table  1,  which  follows. 

13.  Sinhing  fund. — Some  accountants  use  the  sink- 
ing-fund method  in  caring  for  depreciation.  Un- 
der this  scheme  such  an  annual  sum  is  set  aside  as. 


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144  COST    FINDING 

at  compound  interest,  will  amount  by  the  end  of 
the  producing  life  to  the  original  cost  of  the  asset, 
minus  the  "scrap  value."  There  are  several  objec- 
tions to  this  method.  First,  it  is  unnecessarily  cum- 
bersome, mathematically;  and  second,  as  it  is  usually 
applied  to  ordinary  depreciation,  it  is  faulty  in  theory. 
Depreciation  is  an  allowance  for  losses  that  have  al- 
ready occurred.  If  this  loss  is  $200,  yearly,  that 
amount  should  be  set  aside,  and  not  the  amount 
which  will  accumulate  to  that  value  in  a  period 
of  years.  It  will  be  noted,  furthermore,  that  this 
method  usually  withdraws  capital  from  the  enter- 
prise, and  it  does  not  seem  to  be  a  good  financial 
policy  to  set  aside  earnings  to  draw  interest  at  bank 
rates  when,  by  retaining  them  in  the  business,  a  higher 
rate  of  interest  could,  presumably,  be  obtained.  If 
the  enterprise  cannot  produce  earnings  higher  than 
bank  interest  it  might  as  well  go  out  of  business  and 
place  all  of  its  capital  in  the  banks,  thus  avoiding,  to 
a  considerable  extent,  the  risks  incident  to  a  business 
venture. 

14.  Typical  rates  of  depreciation. — The  rates  of 
depreciation  will,  as  before  noted,  vary  widely  with 
the  asset  and  the  service.  A  single  flat  rate  applied 
to  all  assets  is  unintelligent  and  misleading.  Careful 
classification  should,  therefore,  be  made  of  all  assets, 
and  proper  rates  should  be  assigned ;  at  the  same  time 
the.  controlling  factors — original  cost,  estimated  life 
and  "scrap  value" — should  be  constantly  borne  in 
mind.    The  rate  that  should  be  assigned  to  any  class 


DEPRECIATION 


145 


of  asset  will  depend  largely  upon  circumstances,  and 
nothing  more  than  suggestions  can  be  offered  here. 
Judgment  and  expediency  are  always  important  fac- 
tors in  the  fixing  of  these  rates.  The  following  table, 
taken  from  the  author's   "Principles  of  Industrial 

TABLE  2 

ESTIMATED  LIFE,  AND  FACTORS  OF  DEPRECIATION 

Probable  Ratio  of  Percent-  Pereent- 
.       .                               life  of  S(.'raj)to  age  on  ape  on 
^^^                                  asset  oripinal  original  diminish- 
in  years  value  cost  ing  value 
Brick  or  steel  frame  buildings, 

easy   service    40  0.10  2.25  5.5 

Brick  or  steel   frame  buildings, 

severe   service    20  0.10  4.5  11. 

Good     wooden    buildings,    easy 

service    30  0.10  3.  7.5 

Good   wooden   buildings,   severe 

service    15  0.10  6.  It. 

Steam-engines     .; 15  to  30  0.10  6 to  3  It  to  7.5 

Steam-boilers    15  to  30  0.10  6  to  3  14  to  7.5 

Boiler-room   feed   pumps 20  0.05  4.75  14. 

Engine-room     instruments     and 

gauges    10  0.05  9.5  26. 

Steam  piping,  valves  and  fittings  10  to  15  0.0,5  9.5  to  6.3  26  to  18 

Portable  engines  and  boilers...        10  0.05  9.5  26. 

Gas  engines 10  to  15  0.05  9.5  to  6.3  26  to  18 

Turbo-generators    20  to  30  0.10  4.5  to  3  11  to  7.5 

Electric  generators 20  to  30  0.10  4.5  to  3  11  to  7.5 

Electric  motors  20  0.10  4.5  11. 

Storage  batteries    10  0.05  9.5  26. 

Switchboards  and  instruments..        15  0.05  6.3  18. 

Heavv  machine  tools 25  0.10  3.6  9. 

Light  macliine  tools 15  to  20  O.lO  6  to  4.5  14  to  11 

Shafting,  hangers  and  pulleys..  20  to  30  0.05  4.7,>to3  14  to  9 

Belting   10 to 25  ...  10 to 4  

Organization",  gives  average  rates  for  buildings  and 
machinery  kept  in  a  good  state  of  repair.  These 
rates  also  include  allowance  for  obsolescence.  Corre- 
sponding rates  are  given  for  the  methods  of  depre- 
ciation which  have  been  discussed. 


146  COST  FINDING 

15.  Depreciation  a  manufacturing  expense. — It 
should  be  specially  noted  that  depreciation  is  a  manu- 
facturing expense  and  not  a  general  expense,  as  it  is 
so  often  considered.  There  is  no  logical  justification 
for  distributing  depreciation  as  an  even  layer  over  the 
total  shop  costs,  since  the  rate  of  depreciation  varies 
so  greatly  with  various  assets.  At  the  least,  it  should 
be  allocated  by  departments  in  common  with  all 
manufacturing  expenses,  and  all  the  arguments  pre- 
sented later  on,  looking  to  a  still  more  accurate  dis- 
tribution of  all  costs,  are  applicable,  also,  to  depre- 
ciation. 

The  amounts  set  aside  for  depreciation  should,  then, 
be  distributed  against  production,  credited  in  some 
manner  to  the  equipment  accounts  and  debited  to  the 
depreciation  accounts.  The  exact  method  of  hand- 
ling depreciation  reserve  is  a  problem  for  the  ac- 
countant and  the  financier.  Sometimes,  as  has  been 
noted,  it  is  actually  put  at  interest  outside  the  busi- 
ness; on  the  other  hand,  it  is  more  often  retained  as 
working  capital. 

In  conclusion,  it  should  be  remembered  that  mathe- 
matical methods  of  depreciation  cannot  always  be 
rigidly  adhered  to.  Conditions  change  from  j^ear  to 
year,  and  the  state  of  trade  may  make  it  desirable  to 
modify  what  may  have  previously  been  an  excellent 
practice.  The  all-important  fact  to  remember  is, 
that  depreciation  is  a  very  definite  expense  which 
must  be  met,  and  any  well-defined  method  of  deter- 
mining this  depreciation,  even  tho  it  cannot  be  abso- 


DEPRECIATION  147 

lutely  adhered  to,  is  a  safeguard  against  a  day  of  reck- 
oning that  might  prove  fatal  to  the  enterprise. 

REVIEW 

How  would  you  distinguish  the  following  forms  of  lessening 
value : 

(a)  Wear  and  tear,  or  maintenance? 

(b)  Physical  decay,  or  decrepitude? 

(c)  Deferred  maintenance,  or  neglect? 

(d)  Inadequacy? 

(e)  Obsolescence? 

Wliy  is  depreciation  in  the  nature  of  an  expense  item  and  not 
a  part  of  the  disposition  of  the  profits  ? 

^Vllat  are  the  advantages  and  disadvantages  of  the  different 
methods  of  providing  for  depreciation?  How  does  your  com- 
parison of  these  coincide  with  that  in  the  te^t? 

In  your  opinion  would  a  company  be  wise  in  omitting  depre- 
ciation charges  in  any  year  because  this  element  of  loss  was  fully 
covered  by  an  appreciation  in  the  value  of  fixed  assets? 

What  is  a  fair  estimate  of  the  probable  life  of  the  following 
assets:  Steel  frame  buildings,  easy  service?  good  wooden  build- 
ings, severe  service?  steam  engines?  heavy  machine  tools?  belt- 
ing? 

How  would  you  calculate  the  annual  charge  for  depreciation 
of  an  asset  by  each  of  the  methods  indicated  in  the  text?  How 
do  your  conclusions  check  with  those  of  the  texti 


CHAPTER  X 

DISTRIBUTION  OF  FACTORY  EXPENSE 

1.  General. — From  the  foregoing  discussion  it  will 
be  clear  that  while  the  cost  of  direct  labor  and  direct 
material  can,  in  general,  be  allocated  with  a  fair  de- 
gree of  accuracy  to  the  jobs  into  which  they  enter,  the 
problem  of  distributing  the  factory  expense  so  that 
each  job  shall  bear  its  share  of  burden  is  difficult 
and  is  one  that  seldom  admits  of  an  accurate 
solution.  Expense  items  differ  in  their  characteris- 
tics, and  industrial  enterprises  themselves  vary  so 
widely  both  in  size  and  character  that  it  is  not  possible 
to  formulate  any  one  system  of  distributing  expense 
that  will  be  universally  applicable  and  that  will  give 
accurate  results.  It  should  be  remembered,  also,  that 
the  difficulty  of  allocating  expense  grows  with  the 
size  of  the  industry  and  becomes  more  complex  as  the 
number  of  lines  of  goods  increase. 

Nevertheless,  it  is  essential  that  these  expenses  be 
allocated  as  closely  as  possible,  especially  where  sev- 
eral lines  of  product  are  manufactured.  Not  only 
should  each  production  order  be  charged  with  expense 
in  proportion  to  the  use  it  has  made  of  the  manufac- 
turing facilities,  but  if  close  watch  is  to  be  kept  of 

148 


DISTRIBUTION  OF  FACTORY  EXPENSE     14)9 

these  expenses  their  distribution  should  show  the  de- 
partmental responsibility  for  their  creation.  On  the 
other  hand,  managers  are  usually  opposed  to  complex 
systems  and  methods  and  are  content  with  only  a  fair 
degree  of  accuracy.  Xearly  all  cost-finding  systems 
in  use,  therefore,  are  compromises  which  give  approxi- 
mate costs  only.  A  number  of  these  approximate 
methods  are  in  wide  use  and  it  may  be  helpful  to  dis- 
cuss briefly  the  characteristics  and  limitations  of  the 
most  important  ones.  It  will  be  understood  also  that 
the  present  discussion  refers  to  the  distribution  of 
factory  or  manufacturing  expense,  the  distribution 
of  general  expense  being  treated  separately  later  on. 
The  basic  principle  of  all  of  these  methods  is  to  use 
some  tangible  element  in  the  job  as  a  basis  of  compari- 
son by  which  to  measure  the  indirect  expense  which 
should  be  charged  against  it.  It  will  be  remembered 
that  direct  material  and  direct  labor  are  tangible  ele- 
ments that  attach  themselves  to  all  jobs  in  a  direct  and 
measurable  fashion.  The  time  expended  upon  a  job 
is  also  an  element  that  can  be  determined  accurately, 
whether  it  be  the  time  of  the  workman  himself  or  the 
time  of  a  machine  which  has  been  used.  Practically 
all  systems  of  expense  distribution  assume  that  one 
or  more  of  these  tangible  elements  will  form  a  measure 
of  the  proportionate  amount  of  expense  that  the  job 
should  bear.  The  most  important  of  these  systems, 
which  will  be  briefly  discussed,  are: 

^(1)  Distribution  by  percentage  on  material  cost 


160  COST  FINDING 

(2)  Distribution  by  percentage  on  labor  cost 

(3)  Distribution  b}^  percentage  on  prime  cost 

(4)  Distribution  by  percentage  on  man-hours 

(5)  Distribution  by  machine  rates. 

For  simplicity,  it  will  be  assumed  at  present  that 
these  systems  are  applicable  to  the  distribution  of 
the  factory  expense  as  a  whole ;  the  limitations  to  this 
supposition  will  be  discussed  later.  A  more  ad- 
vanced and  more  accurate  method  known  as  distribu- 
tion by  production  factors  deserv^es  special  attention 
and  will  receive  consideration. 

2.  Distribution  by  percentage  on  material  cost. — 
In  distributing  expense  by  percentage  on  the  ma- 
terial cost  it  is  assumed  that  the  burden  varies 
directly  with  the  amount  or  cost  of  the  material 
that  enters  into  the  product.  Suppose,  for  instance, 
that  a  machine  is  built  involving  an  outlay  of  $300 
for  direct  labor,  and  $100  for  direct  material.  Sup- 
pose, further,  that  during  the  period  of  its  construc- 
tion the  total  expenditure  in  the  factory  for  material 
is  $2,500  and  the  total  expense  for  the  same  period 
is  $5,000.  Then  by  this  method  of  distributing  ex- 
pense each  dollar's  worth  of  material  that  goes  into 
a  machine  would  carry  with  it  into  the  cost  thereof 

5,000  ^  „    „  rT^^  1    •    1 

— - —  =  $2  of  factory  expenses,     ihe  expense  which 

the  job  in  question  must  bear  is  then  $100  X  2  ==  $200, 
and  the  factory  cost  will  be: 


DISTRIBUTION  OF  FACTORY  EXPENSE      151 

Direct  labor  =  $300 

Direct  material  =    100 

Expense  =    200 

$600 

3.  Advantages  and  defects. — It  will  be  clear  that  in 
a  simple  continuous  process  involving  the  production 
of  only  one  commodity,  as  is  the  case  in  a  rail  mill  or 
a  cement  plant,  where  every  part  of  the  product 
makes  the  same  use  of  all  the  facilities  of  the  plant, 
the  system  discussed  in  the  previous  section  will  often 
be  adequate.  It  is  sufficient,  in  fact,  in  such  simple 
cases  to  divide  the  entire  cost  of  production  by  the 
total  weight  or  volume  of  the  product  and  establish 
unit  factory  costs  that  are  fairly  accurate.  This  is 
not  because  of  any  inherent  accuracy  in  the  method, 
but  because,  in  these  simple  cases,  allocation  in  a  distri- 
butive sense  is  not  necessary.  All  that  is  required  is 
division  of  the  expense  over  a  uniform  product.  In 
other  cases,  also,  where  the  material  value  entering 
the  factory  product  is  very  large  compared  with  the 
direct  and  the  indirect  labor  cost,  this  method  may  be 
sufficiently  accurate.  The  method  is  applica])le  also 
to  mercantile  establishments  where  the  units  handled 
do  not  vary  widely  in  size  and  value,  and  the  cost  of 
storage,  insurance,  clerical  assistance,  etc.,  is  fairly 
constant. 

If,  however,  more  than  one  commodity,  or  more 
than  one  variety  of  the  same  commodity,  is  manu- 


16^  COST  FINDING 

f  actured,  this  method  of  unit  cost  is  clearly  inaccurate, 
unless  each  unit  of  each  line  of  product  makes  equal 
use  of  all  factory  facilities.  Furthermore,  if  the  cost 
of  the  material  is  used  as  a  basis,  it  is  very  clear  that 
a  line  of  goods  involving  expensive  material  will  be 
burdened  more  than  one  in  which  a  less  valuable  ma- 
terial is  used.  Thus,  two  pieces  of  jewelry  may  be 
manufactured,  alike  in  every  respect,  and  employing 
the  facilities  of  the  factory  to  exactly  the  same  extent, 
one  of  them  being  made  of  gold,  and  one  of  some  less 
valuable  material — clearly,  the  product  made  of  the 
more  valuable  material  will  be  compelled,  under  this 
method,  to  carry  more  than  its  just  share  of  expense. 

It  would  be  logical,  again,  to  charge  more  of  the 
foundry  expense  against  a  large  casting  than  against 
a  small  one ;  but  in  the  machine  shop  the  large  casting 
might  have  a  very  small  amount  of  work  done  upon 
it,  while  the  small  one  might  require  many  hours  of 
labor  and  machine  work.  In  this  case,  therefore,  the 
small  casting  might  be  entitled  to  a  much  heavier  ma- 
chine-shop expense  than  the  larger  one.  Manufac- 
turers using  this  method  of  distributing  expense  will 
experience  difficulty  in  competing,  in  jobs  involving 
much  material  and  little  work,  against  rival  manufac- 
turers using  other  and  more  logical  methods. 

Despite  these  obvious  defects,  however,  the  method 
is  often  useful  and  sufficiently  accurate  in  handling 
such  departments  as  foundries  and  porcelain  works 
attached  to  factories  of  the  intermittent  types,  es- 
pecially if  the  product  of  these  departments  is  fairly 


DISTRIBUTION  OF  FACTORY  EXPENSE      153 

uniform  in  character  and  size,  and  is  passed  thru  in 
large  lots  for  stock  orders.  The  hmitations  of  this 
system  are  most  apparent  where  the  product  is  varied 
in  quantity  and  size. 

4.  Distribution  by  ])ercentage  on  labor  cost. — In 
distributing  the  expense  by  percentage  on  labor  cost 
it  is  assumed  that  the  burden  varies  directly  with  the 
direct  labor  expended  upon  the  job.  Thus,  with 
the  data  assumed  in  Section  2  of  this  chapter, 
suppose  that  the  total  direct  labor  for  the  given 
period  is  $4,000.  Then,  in  the  preceding  exam- 
ple the  expense  which  every  dollar  of  direct  labor 
should  carry  into  the  cost  of  the  machine  will  be 

$5,000 

~ =  $1.25.  The  expense  which  the  job  in  ques- 
tion must  bear  is  therefore  $300  X  $1.25  =  $375,  and 
the  total  factory  cost  will  be : 

Direct  labor  =  $300 

Direct  material  =    100 

Expense  =    375 

$775 

This  result,  as  might  be  expected,  differs  materially 
from  the  cost  obtained  with  material  as  the  basis,  since 
there  is  no  connection  between  the  relative  amounts 
of  material  and  labor  that  enter  into  the  product. 
The  amounts  assumed  above  for  these  items,  while 
taken  at  random,  are  entirely  probable. 

5.  Advantages  and  defects. — In  shops  where  the 


154>  COST  FINDING 

products  are  closely  similar  in  kind  and  do  not  differ 
greatly  in  size  this  method  may,  in  many  cases,  give 
results  accurate  enough  to  justify  its  use.  In  jus- 
tification of  the  method  it  is  sometimes  urged  that  the 
indirect  labor  varies  quite  closely  with  the  direct  labor, 
and  that,  therefore,  the  direct  labor  is  a  measure  of 
expense.  Granting  that  this  may  be  true,  tho  it  is 
not  always  so,  it  should  be  remembered  that  expense 
is  composed  of  several  other  items  besides  indirect 
labor,  and  that  these  items  neither  are  connected  in 
any  way  with  direct  labor,  nor  vary  directly  with  it. 
Because  of  its  simplicity  and  because  wages  are  such 
an  important  and  evident  part  of  the  cost  of  produc- 
tion, this  method  has  been,  and  still  is,  in  extensive 
use.     It  has,  however,  serious  limitations. 

First,  this  method  does  not  discriminate  between 
the  cost  of  work  done  by  a  rapid  workman  and  the 
cost  of  work  done  by  one  less  rapid.  Thus,  a  job 
which  takes  a  rapid  man,  receiving  sixty  cents  per 
hour,  four  hours  to  complete,  is  burdened  with  the 
same  expense  as  a  job  done  by  a  slower  man,  earning 
forty  cents,  and  requiring  six  hours  of  his  time.  This 
method  of  distributing  the  expense,  therefore,  does 
not  differentiate  between  these  two  men  in  the 
final  shop  costs.  Yet  the  slower  man  has  employed 
to  a  greater  degree  the  shop  facilities — -power,  heat, 
lighting,  floor  space,  tools,  etc. — and,  very  clearly,  has 
caused  the  work  to  cost  the  firm  much  more  than 
it  did  in  the  case  of  the  more  rapid  workman.     Then, 


DISTRIBUTION  OF  FACTORY  EXPENSE      155 

too,  because  of  the  decreased  rate  of  output  due  to 
the  slower  man,  there  is  less  total  product  over  which 
to  spread  the  expense,  and  each  part  must  bear  a 
greater  proportion  as  the  rate  of  production  falls, 
since,  as  already  explained,  expense  does  not  vary- 
directly  with  product,  but  increases  relatively  as  pro- 
duction decreases. 

This  method  also  fails  entirely  to  differentiate  be- 
tween tlie  cost  of  large  work  and  the  cost  of  small 
work,  and  the  error  involved  in  its  use  may  become 
large  where  the  size  of  product  and  the  size  of  the 
machinery  required,  vary  widely.  Thus,  the  expense 
charged  to  a  job  involving  labor  worth  $10  by  a 
mechanic  using  a  file  only,  is  exactly  the  same  under 
this  method  as  that  laid  upon  a  job  involving  the  same 
labor  charge,  but  done  by  a  very  large  boring  mill 
requiring  the  use  of  much  greater  floor  space,  heat- 
ing, lighting  and  power,  as  well,  perhaps,  as  the  serv- 
ice of  a  large  overhead  crane.  The  work  done  on  a 
very  costly  automatic  machine  will,  under  this  method, 
bear  j)ractically  no  expense  burden,  tho  it  is  evident 
that  the  interest  charge,  alone,  is  much  greater  for 
the  automatic  machine  than  for  hand  work,  which  may 
bear  heavy  expense  charges.  In  brief,  this  method 
of  distributing  expense  is  an  averaging  method,  and 
fails  wherever  the  indirect  expenses  vary,  since  it  does 
not  give  accurate  results  in  proportion  to  the  varia- 
tion in  the  components  of  the  expense  to  be  dis- 
tributed. 


156  COST  FINDING 

It  will  be  evident,  however,  that  in  shops  where  the 
parts  manufactured  are  of  approximately  the  same 
size  and  character  this  method  may  be  fairly  applic- 
able. The  same  will  be  true  of  very  large  plants 
where  the  volume  of  work  is  so  large  as  to  permit  of 
careful  classification  and  departmentization  so  that 
the  work  in  all  the  departments  is  similar  in  size  and 
character.  In  such  cases  a  different  percentage  may 
be  necessary  for  each  class  or  department  and,  ob- 
viously, this  departmental  method  will  give  more  ac- 
curate results  in  plants  doing  mixed  work  than  can 
be  obtained  by  a  flat  rate  on  the  entire  product.  It 
may  be  noted  in  passing  that  departmentization  may 
not  always  give  the  desired  result.  If  one  depart- 
ment, for  instance,  is  devoted  entirely  to  generators, 
another  to  motors,  and  another  to  transformers,  great 
differences  may  still  exist  in  the  size  and  character  of 
parts  within  each  department.  If,  however,  the  de- 
partmentization groups  all  lathes  of  one  approxi- 
mate size  together,  all  the  large  boring  machines  to- 
gether, and  so  on,  this  method  is  clearly  more  ap- 
phcable.  This  matter  will  receive  further  attention 
in  a  later  section. 

6.  Distribution  by  percentage  on  prime  cost. — In 
the  distribution  of  expense  by  percentage  on  prime 
cost  it  is  assumed  that  the  expense  varies  directly 
with  the  prime  cost.  Thus,  using  the  same  data  as  in 
the  preceding  examples,  the  expense  which  every 
dollar  of  combined  direct  labor  and  material  must  bear 
will  be : 


DISTRIBUTION  OF  FACTORY  EXPENSE    157 

5,000  . 

4,000  +  2,500  =^'^^'     ^^''  '^P'"^"'  therefore,  for 
the  job  under  consideration  will  be   ($100  +  $300) 
X  .77  =  $308,  and  the  factory  cost  will  be: 
Direct  labor  =  $300 
Direct  material  =    100 
Expense  =    308 

$708 

7.  Advantages  and  defects. — Distribution  by  per- 
centage on  prime  cost  has  the  same  inherent  defects 
and  limitations  as  the  methods  previously  discussed, 
since  it  combines  the  bases  of  both  of  them. 
Where  the  value  of  the  direct  labor  entering  into 
the  product  is  small  compared  with  the  value  of 
the  material,  the  method  approaches  the  plan  of  dis- 
tribution by  percentage  on  material.  On  the  other 
hand,  if  the  material  value  is  relatively  low,  the  method 
approaches  the  plan  of  distribution  by  percentage  on 
labor.  In  either  case  there  are  involved  the  errors 
and  limitations  contained  in  one  or  the  other  of  those 
plans. 

In  the  general  case  of  a  factory  making  a  varied 
product,  as  to  both  character  and  size,  one  piece  may 
have  a  relatively  high  labor  value  and  the  very  next 
one  may  have  a  relatively  low  labor  value;  distribu- 
tion by  this  method  is,  in  such  a  case,  not  only  inac- 
curate, but  illogical.  A  manufacturer  doing  a  mixed 
business  will  find  difficulty  in  competing  on  jobs  in- 


158  COST  FINDING 

volving  much  material  and  little  labor  if  his  costs  are 
based  on  this  method.  Even  tho  other  work  which  he 
performs  may  justly  receive  a  large  amount  of  ex- 
pense, the  selling  of  a  product  consisting  of  little  but 
material  does  not,  in  general,  involve  much  factory 
expense.  In  fact,  in  the  extreme  case,  such  goods 
may  not  even  enter  the  factory,  but  may  pass  directly 
from  the  source  of  supplies  to  the  customer. 

8.  Distribution  by  percentage  on  man-hours. — In 
distributing  the  total  expense  by  percentage  on  man- 
hours  it  is  assumed  that  the  expense  which  any  piece 
of  work  should  bear  is  directly  proportional  to  the 
number  of  man-hours  that  have  been  expended  upon 
it.  Suppose  that,  as  in  the  example  already  used,  the 
total  direct  labor  is  $4,000,  and  is  made  up  of  12,500 
hours  of  labor  at  varying  rates.  Assume  also  that  the 
total  expense  is  $5,000  and  the  total  material  is  $2,500, 
as  in  the  previous  cases.  Assume  also,  as  before,  that 
the  direct  material  used  on  the  job  under  considera- 
tion is  worth  $100  and  the  direct  labor  cost  is  $300 ;  but 
assume,  moreover,  that  this  labor  is  made  up  of  1,200 
hours  of  work  at  twenty-five  cents  per  hour.  Then 
the  expense  per  man-hour  chargeable  against  every 

.  ,      .„ .      5,000        ^ 

job  will  be  — =  $.40,  and  the  expense  which  must 

12,500 

be  allocated  to  the  job  under  consideration  will  be 

$.40  X  1,200  =  $480,  whence  the  shop  cost  of  the  job 

will  be: 


DISTRIBUTION  OF  FACTORY  EXPENSE      159 

Direct  labor  =  $300 

Direct  material  =    100 

Expense  =    480 

$880 

9.  Advantages  and  defects. — It  might  seem  at  first 
glance  that  the  man-hours  method  would  give  the 
same  results  as  distribution  by  percentage  on  labor 
alone,  and  this  would  be  the  case  if  all  men  received 
exactly  the  same  rate  of  wages.  Thus,  suppose  that 
the  total  direct  labor  of  $4,000  consisted  of  16,000 
hours  at  twenty-five  cents  per  hour.  Then  the  ex- 
pense chargeable  against  each  man-hour  would  be 

0,000         ^  ,    ,  ,  , ,  . 

=  $.3125,  and  the  expense  chargeable  affamst 

16,000        ^  '  ^  fo  6 

the  job  under  consideration  would  be  $.3125  X  1,200 
=  $375,  or  the  same  as  in  the  method  of  distribution 
by  percentage  on  labor. 

On  the  other  hand,  if  the  job  under  consideration 
received  1,500  hours  at  twenty  cents  per  hour,  or  a 
total  of  $300  as  before,  the  expense  allocated  to  it  by 
this  method  would  be  $.40  X  1,500  =  $600,  and  the 
shop  cost  would  be  $300  +  $100  +  $600  =  $1,000. 
Again,  if  it  received  500  hours  at  sixty  cents  per  hour, 
making  the  same  total  labor  cost  as  before,  the  ex- 
pense chargeable  to  it  would  be  only  $.40  X  500  = 
$200,  and  the  shop  cost  would  be  only  $600.  It  will 
be  seen,  therefore,  that  under  this  method  the  total 
labor  cost  may  be  the  same  on  different  jobs,  but  the 

XII— 12 


160  COST  FINDING 

expense  may  vary  widely.  This  method,  then,  takes 
into  account  the  value  of  time  spent,  the  factory 
cost  decreasing  and  increasing  with  this  factor.  A 
job  done  by  a  high-priced  man  in  a  short  time,  and 
with  minimum  use  of  the  shop  facilities,  is  not  bur- 
dened so  heavily  as  one  done  by  a  cheaper  and  slower 
man  who  uses  the  shop  facilities  for  a  much  longer 
period.  This  is  logical,  and  in  this  respect  the  method 
of  percentage  on  man-hours  is  an  advance  on  the  sys- 
tems previously  discussed. 

The  method  of  percentage  on  man-hours  would 
seem  to  be  more  logical,  in  general,  than  that 
known  as  percentage  on  labor  for  other  reasons. 
A  great  many  of  the  principal  items  of  indirect  cost 
as,  for  instance,  heat,  light,  depreciation,  rent,  insur- 
ance, taxes,  interest,  etc.,  are  more  fairly  propor- 
tional to  time  than  to  wages  or  labor  costs.  There 
is  no  reason  for  assuming  that  the  proportion  of  these 
items  will  be  high  where  wages  are  high,  and  low 
where  wages  are  low;  in  fact,  such  items  as  super- 
vision are  likely  to  be  highest  where  labor  costs  are 
lowest.  The  interest  on  investment  may  be  very  high 
where  low-priced  labor  is  employed  in  operating  auto- 
matic and  semi-automatic  machines. 

On  the  other  hand,  this  method  is  no  better  than 
that  of  percentage  on  labor,  so  far  as  differentiation 
between  the  use  of  equipment  of  different  value  and 
size  is  concerned.  The  same  hourly  rate  is  applied  to 
a  hand  worker  as  is  applied  to  a  $20,000  boring  mill. 
This  results  in  overcharging  small,  cheap  product, 


DISTRIBUTION  OF  FACTORY  EXPENSE     161 

and  undercharging  the  larger  and  more  expensive 
work.  Wlien  applied  over  an  entire  factory  which 
is  engaged  in  making  a  wide  range  of  work,  competi- 
tion with  the  small  articles  of  product  becomes  diffi- 
cult if  such  competition  is  against  other  manufactur- 
ers specializing  in  these  small  articles. 

It  will  be  evident  that  this  method  can  be  applied 
with  accuracy  only  when  the  work  is  of  fairly  unifonn 
size  and  character,  but  it  should  also  be  noted  that' 
the  errors  of  this  method,  like  those  of  the  percentage- 
on-labor  plan,  can  be  obviated  to  some  extent  by  care- 
ful departmentization.  Where  tools  and  processes 
can  be  grouped  so  as  to  obtain  equal  conditions  for 
similar  types  of  machineiy  and  similar  processes,  this 
plan  can  often  be  used  with  success.  Like  the  pre- 
ceding systems  it  has  the  virtue  of  simplicity  and  in 
many  cases  this  is  no  small  advantage. 

10.  Inadequacy  of  foregoing  methods. — It  will  be 
clear  that  under  any  of  the  plans  of  distributing  ex- 
pense that  have  been  discussed  an  averaged  result  is 
ultimately  obtained.  It  is  clear,  also,  that  the  total 
expense  can  be  distributed  with  certainty  by  any  of 
these  methods.  None  of  them,  however,  takes  ac- 
count of  the  fact  that  expense  does  not  weigh 
equally  upon  all  parts  of  the  productive  activities. 
It  is  for  this  reason  that  these  methods  apply  with 
some  semblance  of  accuracy  only  where  the  conditions 
are  more  or  less  uniform,  where  the  wages  paid  do  not 
vary  greatly,  where  the  size  and  character  of  the  equip- 
ment do  not  differ,  and  where  the  lines  of  product 


162  COST  FINDING 

are  not  diverse  in  character.  In  other  words,  where 
the  conditions  are  simple,  only  simple  methods  are 
required.  It  is  for  this  reason,  also,  that  any  of  the 
methods  that  have  just  been  discussed  apply  more 
closely  when  the  factory  can  be  departmentized  so  as 
to  group  machines  and  processes  of  similar  kind  and 
equal  size  together.  Where  this  can  be  done,  and 
each  department  is  accurately  charged  with  its  share 
of  expense,  almost  any  method  of  dividing  the  depart- 
mental expense  will  give  fairly  satisfactory  results, 
since  each  man  or  tool  in  each  department  is,  gener- 
ally speaking,  equally  taxable.  Minute  department* 
ization  of  this  character  is  not  usually  possible,  how- 
ever, and  where  these  simple  conditions  do  not  obtain, 
and  accurate  costs  are  desired,  the  averaging  methods 
so  far  described  are  not  applicable  with  any  degree  of 
accuracy. 

The  reasons  explanatory  of  this  fact  are  funda- 
mental. When  factories  were  smaller,  and  machine 
processes  did  not  constitute  so  large  a  factor  in  manu- 
facturing, wages  or  time  did,  no  doubt,  serve  as  a 
satisfactory  measure  of  expense,  especially  where 
only  rough  costs  were  required.  But  neither  wages 
nor  labor  hours  can  be  taken  as  a  measure  of  expense 
in  modern  factories  where  the  product  varies  as  to 
both  size  and  character.  This  is  markedly  true  where 
machine  processes  constitute  a  large  portion  of  the 
cost  of  production.  The  elements  of  expense  that 
attach  themselves  to  a  handworker  may  be,  and  gen- 
erally are,  very  different  in  value  from  those  connected 


DISTRIBUTION  OF  FACTORY  EXPENSE      163 

with  an  expensive  automatic  machine.  The  range  of 
processes  found  in  some  modern  factories  is  abnost 
bewildering;  so  much  so,  in  fact,  that  any  distribu- 
tion of  expense  by  averaging  methods  may  be  little 
short  of  a  wild  guess,  so  far  as  accurate  allocation  is 
concerned.  This  complexity  is  still  further  increased 
when  machines  and  processes  are  used  intermittently 
in  ever  changing  lines  of  product.  It  is  true,  of 
course,  that  in  all  complex  cases  a  certain  amount  of 
averaging  must  be  done,  but  this  can  be  minimized 
and  the  results  made  more  accurate  than  those  ob- 
tained by  the  methods  heretofore  outlined. 

11.  Relation  between  machine  processes  and  ex- 
pense.— As  a  matter  of  fact,  the  majority  of  factory 
expenses  do  not  attach  themselves  to  labor  or  to  ma- 
terial, but  gather  around  machines  and  processes. 
Consider,  for  instance,  the  items  of  interest  and  de- 
preciation. In  the  averaging  method  referred  to, 
these  expenses  are  distributed  over  the  entire  product 
with  other  items  of  expense,  and  lose  their  identity  en- 
tirely, so  far  as  any  particular  machine  or  process  is 
concerned.  Yet  these  items  of  expense  are  intimately 
connected  with  individual  machines  or  processes  and 
are  definite  parts  of  the  cost  of  operation.  They  are 
not  connected  with  the  wages  of  the  operator,  since 
they  continue  to  accrue  even  when  the  machine  is  idle. 
In  fact  this  is  one  of  the  fundamental  defects  in  using 
wages  or  labor  hours  as  a  basis  of  expense  distribution. 
Many  items  of  expense  continue  to  accrue  even  when 
no  wages  are  being  paid  and  the  factory  is  closed 


164.  COST  FINDING 

down.  It  is  not  logical  that  an  article  produced  by 
hand  labor  should  be  allowed  to  bear  a  portion  of  the 
expense  equal  to  that  borne  by  a  part  machined  on 
a  large  boring  mill;  yet  this  is  just  what  the  averaging 
methods  accomplish  if  they  are  applied  over  diverse 
product  of  varied  size.  Similar  reasoning  applies  to 
such  expenses  as  heat,  light,  power,  insurance,  rent, 
taxes,  repairs,  and  in  fact  to  the  greater  part  of  shop 
expense. 

It  should  be  remembered  also  that  the  amount  of 
these  expenses  may  be  very  large.  Shop  expense  fre- 
quently amounts  to  100  per  cent,  and  sometimes  goes 
as  high  as  150  per  cent,  of  the  direct  wages.  It  is 
fully  as  important  that  this  expense  be  accurately  al- 
located as  that  the  labor  cost  be  correctly  recorded. 
This  is  particularly  true  where  it  is  desired  to  know 
the  cost  of  different  sized  articles  or  different  lines  of 
goods,  with  a  view  to  meeting  competition  on  a  cor- 
rect basis. 

12.  Old  machine  rate. — When,  therefore,  the  tra- 
ditional influence  of  wages  and  labor  hours  is  once  dis- 
carded, it  becomes  clear  that  many  of  the  items  of  ex- 
pense are  naturally  connected  with  the  use  of  equip- 
ment of  one  kind  or  another.  Rent,  insurance,  taxes, 
interest  and  depreciation  are  connected  with  the  use 
of  buildings  and  machines.  Heating,  lighting  and 
power  are  likewise  connected  as  much  with  machines 
as  with  men,  and  if  costs  are  to  be  intelligently  ap- 
plied this  factor  must  be  taken  into  account.  This 
aspect  of  cost  finding  was  recognized  in  mixed  manu- 


DISTRIBUTION  OF  FACTORY  EXPENSE      165 

facturing  many  years  ago,  and  so-called  machine  rates 
have  long  been  in  use.  In  fact,  the  conception  is  a 
very  old  one  and  had  its  origin,  no  doubt,  in  an  in- 
stinctive effort  to  discharge  the  interest  on  investment 
and  wear  and  tear  of  the  machine,  in  a  degree  in  some 
proportion  to  its  size  and  cost.  This  effort  probably 
was  a  natural  result  of  the  growth  in  the  variety  and 
size  of  machines. 

In  its  original  form  the  machine  rate  made  no  ef- 
fort to  insure  accurate  allocation  of  the  total  factory 
expense,  but  attempted  rather  to  equalize  in  some  de- 
gree such  items  of  expense  as  clearly  attached  them- 
selves to  machines  and  processes ;  it  perhaps  took  into 
account  the  probable  life  of  the  machine.  All  ma- 
chines and  processes  were  divided  into  a  few  classes 
designed  often  by  letters  or  numbers.  A  gradu- 
ated hourly  rate  was  then  assigned  to  each  class,  and 
each  piece  of  work  done  on  every  machine  was  taxed 
accordingly,  and  in  proportion  to  the  time  during 
which  it  made  use  of  the  utihty  concerned.  In  most 
cases,  by  some  averaging  method  an  additional  ex- 
pense charge  was  added  to  the  factory  cost  so  deter- 
mined; the  profit  which  was  added  was  sufficient  to 
cover  all  discrepancies.  This  method,  which  might  be 
said  to  belong  to  the  "stone  age"  of  cost  finding,  is 
not  to  be  recommended.  It  is  of  importance,  how- 
ever, because  of  the  principle  involved. 

13.  Modern  machine  rate. — As  the  need  for  more 
accurate  costs  grew,  it  was  a  most  natural  tendency 
to  extend  the  method  to  cover  handwork  as  well  as 


166  COST  FINDING 

machine  processes.  Under  such  systems  the  hourly 
burden  imposed  on  the  work  for  the  services  of  a 
skilled  handworker  might  be  forty  cents  per  hour, 
while  the  hourly  rate  for  a  large  machine  tool  might 
be  $5  per  hour.  Furthermore,  as  the  need  for  accu- 
rate costs  became  still  more  important,  it  was  also  nat- 
ural to  extend  this  system  so  as  to  distribute  the  total 
factory  cost,  if  possible.  The  fundamental  principle, 
then,  in  the  modern  machine  rate  is  to  assign  to  each 
machine  its  own  share  of  expense  for  a  given  period 
of  time.  This  total  expense  is  then  divided  by  the 
estimated  number  of  hours  that  the  machine  or  proc- 
ess w^ill  be  in  use  for  this  same  period ;  this  estimate,  of 
course,  is  based  on  previous  records  or  some  similar 
source  of  information.  The  dividend  so  obtained  is 
the  hourly  rate  which  must  be  applied  to  each  job 
using  the  tool  or  process.  It  is  clear  that  a  close  and 
proportional  allocation  of  all  expenses  wmII  be  accom- 
plished if  each  tool  and  process  is  in  operation  during 
the  exact  time  which  has  been  estimated,  and  if  no 
additions  or  deductions  are  made  to  the  equipment 
and  working  force  during  the  period  considered.  It 
should  be  noted  that  in  using  this  method  a  machine, 
in  this  sense,  will  be  any  machine  or  process  from  a 
vise  to  the  largest  tool.  In  fact,  as  will  appear  pres- 
ently, allocation  may  be  made,  in  this  manner,  to  any 
place  where  the  work  of  men  involves  the  use  of  ex- 
pense items.  The  idea  underlying  this  method,  there- 
fore, is  to  measure  off  directly  to  each  *'machine",  as 
thus  defined,  its  own  share  of  expense,  basing  this 


DISTRIBUTION  OF  FACTORY  EXPENSE      167 

measurement  on  the  use  each  machine  makes  of  the 
several  expense  utihties,  and  not  on  some  arbitrarily 
chosen  standard,  such  as  wages  or  material,  which  is 
in  most  cases  only  remotely  connected  with  the  meas- 
urement of  these  expenses. 

14.  Advantages  and  defects. — Viewed  simply  as  a 
means  of  equalizing  interest  and  depreciation,  the 
simple  machine  rate  may  justify  its  use  in  some  in- 
stances; but  as  ordinarily  used  as  a  means  of  dis- 
tributing the  total  expense,  it  is  greatly  inferior  to  the 
averaging  methods  already  discussed,  so  far  as  accu- 
racy is  concerned.  It  will  at  once  be  recognized  that 
the  allocation  of  all  expenses  by  machine  rate  necessi- 
tates considerable  preparator^^work.  In  a  large  fac- 
tory composed  of  a  number  of  buildings,  each  building 
containing  machines  and  processes  similar  in  size  and 
kind,  an  intelligent  allocation  of  many  expenses  could 
be  made  to  each  department,  and  these  departmental 
expenses  could  easily  be  distributed  by  machine  rate 
if  certain  other  difficulties,  to  be  discussed  later,  could 
be  properly  dealt  with.  For  in  such  a  case  the  de- 
partmental expense  could  be  accurately  allocated  to 
the  building  as  a  whole,  and  each  machine,  theoreti- 
cally, should  share  equally  in  this  burden.  Such  con- 
ditions are,  however,  rather  rare  and  it  is  difficult,  if 
not  impossible,  in  most  cases,  to  secure  these  'condi- 
tions by  rearrangement  of  the  equipment.  In  a 
small  factory,  where  there  are  few  tools  of  each  size 
and  kind,  and  where  the  processes  are  varied,  a  con- 
siderable difficulty  may  arise  in  justly  allocating  the 


168  COST  FINDING 

expense  chargeable  to  each  utihty.  But  even  in  fac- 
tories of  this  type  it  is  possible  to  make  a  fairly  con- 
sistent allocation  of  a  large  portion  of  the  burden. 

It  should  be  noted  that,  altho  a  large  part  of  the 
expense  naturally  gathers  around  machines  and  proc- 
esses, there  are  other  expenses  that  do  not  naturally 
so  attach  themselves.  Thus,  general  labor  and  super- 
vision, crane  service,  transportation  service  and  similar 
expenses,  are  not  so  clearly  assignable  by  machine 
rate  and  may  need  some  form  of  special  determina- 
tion. But  all  of  the  above  objections  can  be  more 
closely  met  than  can  the  inherent  defects  of  the  aver- 
aging methods.  As  will  be  shown,  it  is  possible,  even 
in  complex  cases,  to  work  out  a  machine  rate  that  will 
be  obviously  more  intelligent  than  any  averaging 
method.  Whether  in  any  particular  case  it  will  be 
expedient,  and  whether  it  will  pay  to  do  so,  will,  of 
course,  depend  on  the  immediate  circumstances. 
There  is,  however,  one  fundamental  defect  of  the 
simple  machine  rate  which  destroys  its  accuracy  un- 
less special  precautions  are  taken. 

It  will  be  remembered  that  the  hourly  rate  is  estab- 
lished by  estimating  either  upon  the  basis  of  past  ex- 
perience or  upon  that  of  the  probable  number  of 
hours  the  machine  or  process  will  be  in  operation  dur- 
ing the  period  considered.  Obviously,  the  accuracy 
of  the  hourly  rate  will  depend  on  how  closely  the 
actual  operating  time  of  each  machine  corresponds 
with  the  estimated  time.  Should  a  machine  be  in 
operation  more  than  its  estimated  time,  as  might  occur 


DISTRIBUTION  OF  FACTORY  EXPENSE      169 

in  overtime  work,  due  to  a  hurry  job,  an  overcharge 
of  expense  is  made.  On  the  other  hand,  should  the 
machine  fail  to  operate  the  full  estimated  number  of 
hours  because  of  lack  of  work  or  a  breakdown,  an  un- 
dercharge of  expense  will  be  made.  It  may  happen, 
of  course,  that  these  two  errors  will  balance  each 
other,  but  in  general  they  will  not,  and  there  is  no  defi- 
nite way  of  knowing  just  what  the  error  is.  When 
the  volume  of  work  is  decreasing  the  large  machines 
become  idle  first;  this  may  lead  to  a  serious  under- 
charge which  cannot  be  detected  until  its  appears  in 
the  general  accounts,  too  late,  perhaps,  to  remedy  the 
difficulty.  Furthermore,  it  is  not  possible,  as  a  rule, 
to  estimate  in  advance  just  how  long  any  machine  will 
be  in  operation,  even  when  the  records  of  past  per- 
formances are  available.  It  is  not  always  possible  to 
wait  until  the  end  of  the  month  to  find  out  how  long 
each  tool  has  been  used;  so  that,  in  general,  the  esti- 
mate of  the  operating  time  of  any  tool  or  machine 
must  be  approximate.  The  simple  machine  rate  as 
outlined  depends,  therefore,  for  its  accuracy  on  the 
constancy  of  all  factors,  a  condition  which  seldom,  if 
ever,  occurs. 

Notwithstanding  these  serious  defects,  which  elimi- 
nate the  simple  machine  rate  from  most  of  the  modem 
systems,  this  method  possesses  one  characteristic 
which  is  possessed  by  no  other  system  and  which  has 
not  only  been  the  means  of  keeping  it  alive,  but  which 
also  promises  to  make  it  more  important  in  the  fu- 
ture.    The  machine  rate  does  take  into  account  the 


170  COST  FINDING 

difference  in  the  cost  of  work  done  on  machines  of  dif- 
ferent sizes  and  by  different  processes.  Some  of  the 
relations  which  it  estabhshes  between  the  machine  or 
process  and  the  work  done,  are  fairly  permanent  and 
do  not  vary  with  the  volume  of  business  transacted. 
For  this  reason  it  probably  forms  a  better  basis  for  a 
cost  system  than  any  other  plan. 

15.  Supplementary  rate. — Numerous  expedients 
have  been  proposed  to  make  the  machine  rate  more 
effective.  Space  will  not  permit  a  discussion  of  all 
the  propositions;  in  fact,  most  of  them  are  not  im- 
portant enough  to  merit  much  discussion.  The 
latest  and,  in  all  respects,  the  most  comprehensive  ef- 
fort to  adapt  the  machine  rate  to  modern  conditions  is 
that  of  Mr.  A.  Hamilton  Church.  Mr.  Church  has 
endeavored  to  make  the  machine  rate  more  service- 
able by  the  use  of  a  so-called  supplementary  rate,  the 
operation  of  which  will  now  be  briefly  described.  All 
expenses  which  can  be  so  allocated  are  apportioned  to 
machines  and  processes  proportionally.  These  allo- 
cated expense  items  are  charged  off  by  a  machine 
rate,  as  already  described.  A  record  is  kept  of  all 
such  expense  so  distributed  and  at  the  end  of  the 
month,  or  whatever  other  period  has  been  selected,  the 
total  sum  of  this  distributed  expense  is  subtracted  from 
the  total  shop  expense  which  has  accrued  during  the 
period.  The  difference  so  obtained  is,  of  course,  the 
expense  which  remains  to  be  distributed ;  it  represents 
the  expense  which  has  not  been  distributed  by  machine 


DISTRIBUTION  OF  FACTORY  EXPENSE      171 

rate,  owing  to  idleness  of  the  machines,  plus  all  other 
general  shop  expenses  which  cannot  be  allocated  to 
machines  or  processes.  If  all  machines  and  processes 
have  been  in  operation  the  exact  time  used  in  esti- 
mating the  machine  rate,  the  undistributed  expense 
will,  obviously,  consist  entirely  of  general  shop  ex- 
penses. Whatever  the  content  of  this  residual  ex- 
pense, either  it  is  charged  off  by  one  of  the  averaging 
methods  that  have  been  described  over  the  jobs  that 
have  gone  thru  during  the  period,  or  it  is  distributed  as 
a  percentage  on  the  expense  akeady  apportioned 
to  those  jobs  by  the  machine  rate. 

Theoretically  at  least,  this  method  makes  the  most 
intelligent  allocation  of  the  bulk  of  the  expenses,  and 
with  this  supplementary  rate  the  total  expense  will  be 
distributed  with  as  much  certainty  as  by  the  averag- 
ing methods.  The  supplementary  rate  serves  also  as 
an  index  to  the  volume  of  work  in  the  shop.  A  rising 
supplementary  rate  would  indicate  lack  of  work,  while 
a  falling  rate  would  indicate  reverse  conditions.  In 
principle,  at  least,  the  machine  rate,  with  the  supple- 
mentary rate,  offers  an  attractive  solution  to  one  of 
the  most  difficult  problems  of  cost  finding. 

It  will  be  obvious,  also,  that  in  many  cases  approxi- 
mate machine  rates  can  be  assigned  without  great  dif- 
ficulty. In  the  general  case  of  mixed  manufacturing, 
however,  the  assigning  of  the  machine  rate  requires 
considerable  preliminary  work,  if  any  approach  to 
accuracy  is  to  be  obtained,  and  this  weakness  con- 


112  COST  FINDING 

stitutes  the  greatest  defect  of  the  method.  Mr. 
Church's  plan  is  so  logical,  however,  that  it  is  dis- 
cussed more  fully  in  the  succeeding  chapter. 

REVIEW 

Why  is  the  question  of  the  distribution  of  expense  burden  im- 
portant ? 

Using  your  own  figures,  how  would  you  distribute  expense 
burden  under  the  following  methods : 

(a)  Distribution  by  percentage  on  material  cost? 

(b)  "  "  "  "        labor        "   ? 
c}  prime  r 

(d)  "  "  "  "  man-hours    "   ? 

What  is  the  inherent  defect  in  all  of  the  above  methods,  and 
to  what  class  of  enterprise  may  each  method  be  applied  without 
serious  error? 

What  is  the  difference  between  the  old  and  the  modern  machine 
rates?     What  do  you  understand  by  the  supplementary  rate? 

What,  in  your  opinion,  are  the  principal  defects  of  these 
methods  of  burden  distribution  ?  , 


CHAPTER  XI 

PRODUCTION  CENTERS  AND  THE 
SUPPLEMENTARY  RATE 

1.  General  principles. — The  method  of  distributing 
expense  by  the  machine  rate  and  the  supplementary- 
rate  has  come  into  prominence  thru  the  writings  of 
Mr.  A.  Hamilton  Church,^  who  has  investigated  the 
plan  very  thoroly,  and  whose  reasoning  presents  a 
somewhat  different  point  of  view  from  that  upon 
which  the  old  averaging  methods  are  based.  As  a  re- 
sult of  this  reasoning  the  shop  or  factory,  instead  of 
being  regarded  as  an  organized  whole,  as  in  the  aver- 
aging methods,  is  regarded  as  "a  collection  of  pro- 
duction centers,  each  differing  from  the  other,  with 
certain  common  connecting  bonds",  which  are  the 
averaged  or  general  factors  in  the  expense  charge. 

As  Mr.  Church  explains: 

A  production  center  is,  of  course,  either  a  machine  or  a 
bench  at  which  a  handicraftsman  works.  Each  of  these  is 
in  the  position  of  a  little  shop  carrying  on  one  little  spe- 
cial industry,  paying  rent  for  the  floor  space  occupied,  inter- 
est for  the  capital  involved,  depreciation  for  wear  and  tear, 
and  so  on,  quite  independently  of  what  may  be  paid  by  other 

1  See  "The  Proper  Distribution  of  Expense  Burden",  by  A.  H.  Church; 
also  "Production  Factors  in  Cost  Accounting  and  Works  Management", 
by  the  same  author. 

173 


174.  COST  FINDING 

production  centers  in  the  same  shop.  Then,  in  addition  to 
this,  there  will  be  a  separate  debit  representing  those  items 
of  expense  which  can  be  treated  only  as  an  average  all-round 
charge. 

2.  Production  centers  illustrated. — This  conception 
will  become  clearer  if  the  factory  be  regarded  as  con- 
sisting of  a  large  number  of  small  productive  units, 
separated  physically  from  each  other  and  supplied 
with  heat,  light  and  power  from  a  central  station  in 
such  a  way  that  all  such  services  can  be  measured  and 
debited  against  each  little  shop.  These  little  shops 
will  necessarily  vary  in  size  and  in  the  size  and  char- 
acter of  their  equipment. 

If,  now,  the  owner  of  this  factory  should  rent  some 
of  these  little  shops  to  employes  and  should  operate 
others  himself,  he  would  not  charge  off  the  operating 
expense  by  any  system  of  averaging.  He  would, 
necessarily,  keep  an  independent  account  with  each 
production  center  so  as  to  be  able  to  show  the  exact 
amount  of  each  service  (or  production  factor)  that  he 
supplies  to  each  shop.  Some  of  these  services,  such 
as  insurance,  depreciation,  taxes  and  supplies,  could 
be  accurately  recorded  and  charged  to  each  center. 
Others,  such  as  heat,  light  and  power,  could  not  be 
charged  with  quite  the  same  accuracy,  but  still  with 
accuracy  enough  for  all  ordinary  purposes.  Other 
items  of  general  service,  such  as  transportation  and 
telephone  service,  might  give  still  greater  trouble;  yet 
a  fair  approximation  could  be  made  even  in  these 
cases.     And  lastly,  there  might  be  a  small  residuum 


PRODUCTION  CENTERS  175 

of  expense,  so  general  that  it  might  have  to  be  dis- 
tributed by  some  averaging  method. 

The  workman  renting  one  of  these  little  imaginary- 
shops  would  then  receive  a  periodical  statement  of 
his  indebtedness  to  the  owner.  He  could  add  thereto 
any  other  expenses  peculiar  to  his  work  and,  by  esti- 
mating the  number  of  hours  during  which  his  machine 
was  in  operation,  he  could  compute  a  machine  rate 
that  would  discharge  all  of  his  expense  in  the  man- 
ner already  described,  l^y  means  of  a  supplementary 
rate,  as  previously  explained,  he  could  also  care  for 
any  other  expense  which  could  not  be  controlled  in 
this  manner,  and  also  for  the  difference  between  the 
actual  and  the  estimated  number  of  hours  during 
which  his  machine  was  in  service. 

3.  Application  to  actual  conditions. — It  would 
seem  that  these  conditions  do  not  change  simply  be- 
cause the  imaginary  walls  are  taken  away  from  these 
little  shops  and  a  large  building,  housing  them  all,  is 
erected  over  them.  Mr.  Church's  argument  that  this 
method  is  the  only  accurate  one  of  finding  costs  seems 
logical.  The  possible  functions  of  a  manufacturer 
are  numerous.  He  may  be  an  owner  or  he  may  be  a 
renter.  He  may  supply  his  own  power  or  he  may  buy 
it.  He  may  furnish  his  own  heat  and  light,  or  he  may 
depend  on  others  for  these  services.  Viewing  the 
manufacturer  from  this  standpoint,  it  is  clearly  more 
logical  to  segregate  his  expenditures  according  to 
functions  than  it  is  to  segregate  them  according  to  the 
kinds  of  workmen  employed.     The  workman  who 

XII— 13 


176  COST  FINDING 

rents  one  of  the  little  shops  discussed  above,  will  be 
interested,  for  instance,  in  the  cost  of  power  per  kilo- 
watt as  measured  by  his  meter,  and  will  not  be  inter- 
ested in  the  average  cost  of  repairs  to  the  entire  fac- 
tory of  which  the  power  plant  forms  a  part. 

An  analysis  of  all  labor  expended  in  a  given  time, 
arranged  according  to  the  kinds  of  labor  employed, 
does  not,  in  general,  give  as  intelligent  a  view  of  what 
has  occurred  as  an  analysis  arranged  to  show  the  re- 
sults of  the  several  activities  or  functions  of  the  busi- 
ness. There  does  not  seem  to  be  any  reason  why  the 
manufacturer  should  not  know  the  unit  cost  of  his 
power,  no  matter  whether  he  buys  it  or  produces  it 
himself. 

It  will  be  seen,  therefore,  that  the  general  idea  of 
classifying  and  distributing  the  expense  according  to 
the  functions  or  activities  of  the  business  is  decidedly 
different  from  that  which  lumps  all  expenses  together 
and  distributes  them  uniformly  over  the  entire  prod- 
uct. The  first  classifies  all  expenses  that  apply  to 
each  activity  or  service  of  the  business  in  such  a  way 
that  this  service  and  its  efficiency,  or  inefficiency,  stand 
clearly  revealed.  The  second  and  older  method 
throws  into  one  lump  all  expense  of  a  given  kind, 
without  regard  to  the  service  rendered,  and  at  best 
gives  nothing  more  than  comparative  totals  which 
may  or  may  not  be  useful.  This  may  be  made  clearer 
by  considering  the  problem  a  little  more  concretely. 

4.  Production  factors. — In  discussing  the  concrete 
case  of  an  actual  factory  Mr.  Church  classifies  the  pro- 


PRODUCTION  CENTERS  177 

duction  factors,  or  services  rendered  to  production 
centers,  as  follows: 

a.  Land-building  factor,     d.  Heating  factor. 

b.  Power  factor.  e.  Organization  factor. 

c.  Lighting  factor.  f.  Supervision  factor. 

g.  Stores-transportation  factor. 

These  are  general  factors  that  serve  production  cen- 
ters in  varying  degree,  according  to  their  needs,  and 
they  are,  in  general,  the  most  difficult  to  allocate.  In 
addition,  each  center  will  have  certain  expense  fac- 
tors which  are  peculiar  to  itself,  and  which  arise  out 
of  the  character  of  the  production  center  and  the 
work  therein  performed.  These  include  such  items 
as  interest,  depreciation,  repairs,  supplies  and  all 
other  expenses  which  obviously  are  entirely  of  a  local 
character,  and  which  belong  strictly  to  the  production 
center  concerned,  bearing  no  relation  to  any  other 
machine  or  process.  It  remains  to  consider  the  prac- 
tical distribution  of  these  several  factors  to  the  vari- 
ous centers.  This  feature  of  the  plan  is  here  dis- 
cussed in  order  to  bring  out  clearly  the  general 
principles  involved  and  to  show  the  difficulties  to  be 
encountered. 

The  first  step  in  arranging  this  system  is  to  lay  off 
the  factory  into  production  centers.  These  centers 
may  include  no  tools  at  all,  or  they  may  include  only 
one  tool,  as  in  the  case  of  the  large  machines,  or  they 
may  contain  several,  as  in  cases  where  a  number  of 
tools  exactly  alike  are  grouped  together.     The  entire 


178  COST  FINDING 

factory  must  be  mapped  out  in  this  manner  in  order 
that  all  equipment  may  be  accounted  for. 

5.  Land-building  factor. — The  first  factor  to  be 
considered  would  probably  be  the  land-building  factor» 
and  the  first  item  under  this  heading  would  natu- 
rally be  the  rental  of  the  ground  on  which  the  building 
stands,  or  the  equivalent  interest  on  the  investment 
in  the  land,  if  it  is  owned  by  the  proprietor.  To 
this  would  be  added  the  rental  of  the  buildings  (or  the 
equivalent  interest  if  they  are  owned  outright),  and 
the  taxes,  insurance,  repairs  and  depreciation  on  them. 
The  total  of  these  charges  divided  by  the  total 
productive  floor  area  would  give  the  charge  per  unit 
of  floor  area  which  must  be  made  against  each  pro- 
duction center. 

In  making  such  computations  it  may  be  necessary 
to  take  into  account  the  use  to  which  different  floor 
areas  are  put.  Thus,  space  in  a  high  building  used 
for  erection  purposes,  and  served  by  an  overhead 
traveling  crane,  will  be  more  valuable  than  the  floor 
space  of  an  adjoining  building  where  three  or  four 
floors  are  used.  This  difference  can  be  compensated 
for  by  charging  a  higher  rate  for  the  floor  space  in 
the  high-roofed  shop  in  computing  the  unit  sj^ace 
charge  as  outlined  above,  and  also  in  computing  the 
total  space  charge  for  the  high-roofed  shop. 

In  some  cases  the  buildings  cover  only  a  small  part 
of  the  land,  the  remainder  being  used  for  storage  or 
other  useful  purposes  directly  connected  with  the 
business;  or  part  of  the  grounds  may  be  used  in  an 


PRODUCTION  CENTERS  17^ 

ornamental  way  for  lawns  and  parks.  Again,  the 
ground  may  be  held  under  still  different  conditions. 
Part  may  be  owned  outright,  part  may  be  mortgaged, 
or  part  may  be  leased.  Obviously,  no  definite  rule 
can  be  laid  down  that  will  cover  all  cases,  so  each  must 
be  handled  according  to  the  conditions  existing.  In 
all  cases,  however,  the  land-building  factor  may  be 
measured  in  terms  of  floor  area. 

6.  Power  factor. — The  distribution  of  the  cost  of 
the  power  used  may  be  veiy  simple,  or  it  may  be  com- 
plex. If  electric  power  is  purchased  and  each  ma- 
chine has  its  own  meter,  it  will  not  be  difficult  to 
apportion  the  power  cost  with  accuracy.  But  in  the 
average  factory  such  simple  conditions  seldom  exist. 
The  same  set  of  boilers  may  furnish  steam  for  operat- 
ing engines  which  supply  power  to  the  factory,  to  hy- 
draulic pumps  which  supply  a  hydraulic  system,  and 
also  to  air  compressors  which  supply  a  pneumatic 
system. 

The  transmission  system  may  be  complex,  and  it 
may  be  diflficidt  to  separate  its  services  by  depart- 
ments unless  the  system  has  been  constructed  with 
this  end  in  view.  In  addition,  a  large  amount  of 
power  may  be  used  in  testing  new  product,  as  in  the 
case  of  factories  making  electrical  machinery. 

But  even  in  complex  cases  a  division  of  the  total 
power  supplied  can  be  made  in  a  satisfactory  man- 
ner, tho  it  may  not  be  absolutely  accurate.  Evi- 
dently, in  very  complex  cases  some  estimating  must 
be  done;  the  total  output  of  power  of  any  kind  can 


180  COST  FINDING 

then  be  debited  to  the  several  centers  using  it,  in  pro- 
portion to  the  capacity  of  the  motor  or  belt  which 
operates  it. 

As  before  explained,  an  estimate  must  be  made  of 
the  time  each  center  will  be  in  actual  operation.  The 
product  of  this  estimated  time  and  the  horsepower 
assigned  to  each  center  gives  the  horsepower  hours 
which  each  center  is  expected  to  use.  The  total  horse- 
power hours  developed,  divided  into  the  total  cost 
of  the  power,  will  give  the  rate  per  horsepower  hour 
that  must  be  used  in  distributing  the  power  expense. 
The  total  cost  of  any  one  kind  of  power  must  include 
depreciation,  repairs,  fuel,  etc.,  and  the  interest  on 
that  part  of  the  power  plant  which  supplies  the  power. 

7.  Lighting  factor. — The  general  method  of  ap- 
portioning the  lighting  expense  would  be  similar  to 
that  pursued  for  the  problem  of  power,  in  so  far  as 
allocating  the  total  cost  to  any  one  building  is  con- 
cerned. The  total  cost  of  lighting  that  is  assigned  to 
any  building,  divided  by  the  total  floor  area  of  the 
building,  as  in  the  case  of  the  building  factor,  will  give 
the  total  charges  per  unit  of  floor  area,  and  the  amount 
that  would  belong  to  each  production  center  may  be 
found  by  multiplying  this  unit  charge  by  the  floor 
space  assigned  to  the  center.  Due  care  must,  of 
course,  be  taken  that  interest,  repairs,  depreciation, 
etc.,  over  the  entire  lighting  equipment  are  equitably 
distributed  to  each  building  so  far  as  possible,  as  well 
as  that  the  actual  cost  of  the  gas  or  electricity  supplied 
is  accurately  estimated. 


PRODUCTION  CENTERS  181 

8.  Heating  factor. — The  problem  of  heating  and 
ventilating  is  very  similar  to  that  of  lighting,  the  cost 
being  reduced  to  a  charge  per  unit  of  floor  area. 
These  items,  as  in  the  case  of  lighting,  are  not  con- 
stant the  year  round.  Thus,  heating  may  be  required 
during  only  a  few  months  of  the  year.  It  would  not 
be  good  policy,  however,  to  charge  off  these  heavy 
expenses  during  the  months  they  are  incurred.  The 
total  cost  of  heating  and  ventilating  the  factory  is, 
therefore,  spread  out  over  the  entire  year,  lighting 
being  treated  in  a  similar  manner. 

It  would  appear,  therefore,  that  even  in  this  method 
of  distributing  expense,  some  averaging  must  be  re- 
sorted to;  exact  distribution  in  point  of  time  would 
not  be  desirable.  It  should  be  noted,  however,  that 
this  averaging  is  within  the  service  itself.  It  simply 
equalizes  the  service  charge  over  a  period  of  time, 
differing  in  this  respect  from  the  old  averaging  meth- 
ods, which  average  all  services  over  all  activities,  re- 
gardless of  the  use  each  activity  has  made  of  such 
services. 

9.  Organization  factor. — Under  the  term  organi- 
zation factor,  Mr.  Church  includes  such  elements  as 
the  building  factor  of  offices,  cost  of  time  and  cost 
keeping,  factory  office  expenses,  wages  of  watchmen, 
interest,  and  depreciation  and  repairs  on  office  fur- 
niture and  fixtures.  There  is  no  difficulty  in  obtain- 
ing the  yearly  and  monthly  totals  of  these  items,  and 
it  only  remains  to  assign  this  total  by  machine  rate. 

In  a  very  large  establishment  which  is  highly  de- 


18^  COST  FINDING 

partmentized  this  total  could  be  apportioned  to  tlie 
several  departments  with  a  fair  degree  of  accuracy; 
but  after  such  an  apportionment  is  made  for  a  large 
plant,  and  always  in  the  case  of  a  small  factory,  fur- 
ther allocation,  based  on  services  rendered,  would  be 
difficult.  It  is  sufficiently  accurate,  however,  to  dis- 
tribute these  departmental  totals  by  simple  division 
over  the  production  centers  involved.  The  cost  of 
this  class  of  service  is  not,  in  general,  affected  by  the 
size  or  weight  of  the  parts  handled.  It  costs  as  much 
to  put  in  a  production  order  for  a  small  part  as  it 
does  in  the  case  of  a  large  one.  This  method  will, 
therefore,  be  substantially  correct.  The  result  ob- 
tained by  dividing  the  total  organization  expenses 
by  the  number  of  production  centers  involved,  will 
give  the  factor  which  may  be  included  in  the  machine 
rate  to  cover  these  expenses. 

10.  Management  and  supervision  factor. — The 
management  and  supervision  factor  will  include  the 
wages  of  superintendents  and  foremen,  cost  of  in- 
spection, the  building  factor  of  such  offices  as  pertain 
to  supervision,  and  the  interest,  depreciation  and  re- 
pairs incident  to  the  equipment  involved.  Brief  re- 
flection will  show  that  there  is  no  fixed  or  best  way 
•for  allocating  this  expense;  the  method  used  must 
vary  with  the  circumstances.  In  other  words,  the 
element  of  judgment  must  enter  into  the  distribu- 
tion of  this  factor.  Many  of  the  items  can  be  local- 
ized without  trouble,  and  when  this  has  been  accom- 
plished the  remainder  should  be  distributed  after  a 


PRODUCTION  CENTERS  183 

careful  survey  has  been  made  of  the  relative  value 
of  the  services  which  they  have  rendered. 

11.  Stores  and  transportation  factor, — The  last 
factor,  stores  and  transportation,  is  by  far  the  most 
difficult  to  apportion.  This  factor  will  include  the 
cost  of  storing,  handling,  and  transporting  material 
during  manufacture.  It  will  not  include  freight  and 
cartage  of  finished  product,  or  such  items  as  the  hand- 
ling of  coal  and  ashes,  which  belong  in  the  power- 
house accounts. 

Mr.  Church  has  pointed  out  that  the  storing  of 
materials,  moving  them  from  stores  to  shops,  and  from 
machine  to  machine,  constitutes  a  separate  and  dis- 
tinct service  that  should  be  accounted  for  separately 
and  charged  for  in  proportion  to  services  rendered. 
It  is  true,  also,  that  the  efficiency  of  the  factory  is 
measured  largely  by  the  efficiency  of  the  system  of 
stores  and  transportation;  hence  comparative  costs 
on  this  class  of  service  would  be  valuable,  aside  from 
their  use  in  cost  finding.  Mr.  Church  has  also  noted 
that  this  factor  is  divisible  into  two  parts — the  cost 
of  storing  materials  and  the  cost  of  moving  ma- 
terials. It  should  also  be  observed  that  the  alloca- 
tion of  this  item  cannot  be  made  on  the  basis  of  the 
value  of  the  materials  handled  unless  the  material 
is  all  of  one  kind.  It  costs  no  more  to  handle  brass 
castings  than  it  does  to  handle  wooden  articles.  Bulk 
or  weight  must  be  the  basis  for  such  allotment. 

Furthermore,  it  can  be  easily  seen  that  there  is  no 
fixed  rule  or  method  by  which  this  apportioning  can 


184  COST  FINDING 

be  accurately  accomplished;  it  is  principally  a  ques- 
tion of  judgment.  In  a  shop  doing  mixed  work  in 
an  intermittent  manner  very  accurate  allocation  of 
this  item  is  impossible. 

In  this  item,  however,  if  due  care  is  taken,  the  cost 
of  the  general  stores  can  be  allocated  to  departments, 
the  cost  of  the  transportation  service  can  be  localized 
as  far  as  possible,  and  the  items  of  general  utility 
can  also  be  apportioned  as  good  judgment  may  dic- 
tate. Even  such  a  disposition  of  these  expenses  will 
be  fairer  than  that  obtained  by  the  averaging  method, 
which  taxes  all  activities  equally.  When  the  totals 
have  been  allocated  to  each  center,  the  amount  charge- 
able against  each  can  be  reduced  to  an  hourly  rate 
and  included  in  the  machine  rate  as  before. 

12.  Individual  factors. — In  addition  to  the  general 
factors  that  have  been  discussed  there  will  be,  as  has 
been  noted,  certain  expenses  that  are  directly  con- 
nected with  each  production  center  itself,  and  which 
have  no  connection  whatever  with  other  centers. 
Thus,  repairs,  interest  on  the  value  of  the  machinery, 
depreciation,  insurance,  and  such  supplies  as  may  be 
necessary  for  operation,  may  be  mentioned  as  ex- 
amples of  these  individual  factors.  In  some  cases 
the  cost  of  tools  or  attachments  might  be  included  in 
this  charge.  Obviously,  the  totals  of  these  items  can 
be  reduced  to  an  hourly  charge  which  can  be  included 
in  the  machine  rate.  The  relation  between  deprecia- 
tion and  repairs  requires  no  further  comment  except 
to  point  out  that  a  careful  distinction  should  be  made 


PRODUCTION  CENTERS  185 

between  repairs  that  add  to  the  producing  value  of  the 
centers  and  those  that  simply  replace  wear  and  tear. 

13.  Controlling  accounts. — It  will  be  evident  that 
some  means  must  be  provided  for  insuring  that  the 
total  cost  of  each  service  is  properly  distributed  as 
the  expenses  rise  and  fall,  and  that  the  supplemen- 
tary rate  absorbs  the  residue.  In  all  averaging  meth- 
ods the  same  care  must  be  exercised  with  regard  to 
the  totals  of  all  expenses.  To  accomplish  this,  Mr. 
Church  advocates  the  use  of  control  accounts,  an 
account  being  kept  for  each  factor.  All  accruing  ex- 
penses of  a  given  kind  are  carried  to  the  proper  con- 
trol account  and  placed  on  the  debit  side.  All  ex- 
penses distributed  are  placed  on  the  credit  side.  The 
difference,  if  any,  indicates  the  change  which  must 
be  made  in  the  machine  rate  to  obviate  discrepancies. 
Clearly,  such  controlling  accounts  can  be  used  with 
advantage  for  equalizing  heavy  expenses  over  definite 
periods  of  time. 

14.  Assembling  of  production  factors. — The  fore- 
going discussion  of  production  factors  is  based 
largely  on  Mr.  Church's  reasoning,  and  is  intro- 
duced particularly  to  show  the  character  and  the 
difficulty  of  the  problem  rather  than  to  offer  specific 
methods  of  solution.  It  may  be  well,  however,  to  note 
some  methods  for  collecting  these  factors  into  concise 
and  usable  form.  Evidently  the  problem  is  complex 
and  should  be  undertaken  systematically.  Figure  14 
shows  a  form  suggested  by  Mr.  Church,^  and  arranged 

a  See  "Production  Factors",  by  A.  Hamilton  Church,  p.  128. 


186 


COST  FINDING 


for   the   convenient    collection   of   these    items.    A 
schedule  like  this  may  be  provided  for  each  shop  or 


SCHEDULE  OF 

AND  MACHINE  RATES 

1 

DESCRIPTION 

1 

2 

MACHINE  NO. 

1 

1 

3 

SPACE  OCCUPIED 

J 

4 

POWER  ABSORBED 

5 

CAPITAL  VALUE 

6 

DEPRECIATION  RATE 

, 

1 

BUILDING  FACTOR 

8 

POWER  FACTOR 

9 

LIGHTING  FACTOR 

1 

10 

HEATING  FACTOR 

1 

11 

STORES-TRANSPORT  FACTOR 

1 

12 

SUPERVISION  FACTOR 

J 

IS 

ORGANIZATION  FACTOR 

U 

INTEREST,  DEPC'N  &  INSR'CE 

15 

REPAIRS  &  MAINTENANCE 

16 

OIL  AND  ALLOWANCE 

17 

TOOL  ROOM  CHARGE 

J 

18 

YEARLY  TOTAL  FOR  2700  MRS. 

19 

HOURLY  RATE 

1 

SHOP  FACTORS 
i 

SHOP 

TOTALS  PER 

ANNUM 

1 

J 

1 

1 

1 

1 

1 

J 

ji 

1 

1 

Figure  14.    Schedule  for  Distributing  Exfekse  According  to 
Production  Factors 


department,  and  there  should  be  a  vertical  column 
for  every  production  center  in  the  shop.  The  total 
hourly  rate  then  may  be  found  for  each  center  by 


PRODUCTION  CENTERS  187 

dividing  the  total  of  all  charges  by  the  total  hours  of 
operation.  s 

While  comprehensive,  so  far  as  the  detail  is  con- 
cerned into  which  the  production  factor  idea  is  car- 
ried, this  form  is  arranged  for  recording  the  final 
values  only  and  does  not  assist  materially  in  actually 
computing  these  values.  An  examination  of  Figure 
15  may  be  of  service,  therefore,  in  the  application 
of  the  foregoing  methods.  Figure  15  shows  a  hypo- 
thetical analysis  of  this  problem,  made  by  Mr.  Sterling 
Bunnell  ^  and  reproduced  from  his  work  on  "Cost 
Keeping",  with  minor  changes  to  make  its  discussion 
clearer.  The  example  selected  is  drawn  from  a  small 
shop,  with  one  high  story  housing  the  larger  tools,  and 
an  adjoining  two-story  building  housing  the  smaller 
tools.  The  high  story  is  equipped  with  a  traveling 
crane.  Mr.  Bunnell  illustrates  several  good  approx- 
imations and  other  means  by  which  the  detail  of  the 
method  may  be  shortened  without  materially  affect- 
ing its  accuracy.  A  brief  study  of  this  tabulated 
statement  will  make  the  possibilities  of  the  method 
more  real. 

In  the  table,  the  first  column,  reading  from  left  to 
right,  contains  the  number  of  the  production  center. 
This  number  may  be  attached  to  the  production 
unit  in  any  convenient  manner  that  will  make  identi- 
fication sure  and  estsy.  The  second  column  contains 
the  name  and  the  size  of  the  unit.  The  third  and 
fourth  columns  contain  the  single-story  and  two-story 

»  See  "Cost  Keeping",  by  Sterling  Bunnell,  p.  152. 


188  COST  FINDING 

floor  space  allocated  to  each  production  center.  The 
fifth  column  gives  the  value  of  the  equipment  in  each 
center.  The  sixth  column  gives  the  estimated  life  of 
the  asset,  taking  obsolescence  into  account.  Column 
seven  gives  the  estimated  average  horsepower  re- 
quired to  operate  the  unit,  while  column  eight  gives 
the  estimated  number  of  hours  during  which  the  ma- 
chine or  production  center  will  be  in  use  during  the 
month.  These  latter  values  must,  of  course,  be  es- 
tablished by  estimate  unless  means  are  provided  for 
measuring  the  power  consumed  over  a  considerable 
period  of  time;  but  if  estimated,  their  total  should 
check  with  the  total  power  developed.  Column  nine 
gives  the  horsepower  hours  used  by  each  unit,  found 
by  multiplying  together  the  corresponding  values 
given  in  columns  seven  and  eight.  Column  ten  con- 
tains the  charges  for  interest,  depreciation,  and  in- 
surance. In  Mr.  Bunnell's  original  example,  only 
depreciation  is  given  in  this  column,  interest  and 
insurance  apparently  not  being  included  in  the  an- 
alysis. From  the  discussion,  however,  it  will  appear 
that  these  and  similar  items  should  be  included  in 
exactly  the  same  manner  as  depreciation.  The  values 
given  in  column  ten  are  those  listed  by  Mr.  Bunnell 
for  depreciation  alone  and  would,  therefore,  be  too 
small  if  interest,  insurance,  taxes,  etc.,  were  included. 
They  will  serve,  however,  to  illustrate  the  principle. 
The  unit  space  charge,  column  eleven,  is  found  by 
dividing  the  interest  on  the  building  and  ground,  or 
the  rent  charge  for  them  (in  this  case  taken  at  10  per 


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190  COST  FINDING 

cent  on  $18,000,  or  a  total  monthly  charge  of  $150), 
by  the  total  area,  after  doubling  the  area  of  the  high- 
story  building.  This  gives  approximately  1.1  cents 
per  month  per  square  foot  of  space  for  the  low-story 
floors  and  2.2  cents  for  the  high-story.  Multiplying 
the  areas  in  columns  three  and  four  by  the  proper 
respective  rate  gives  the  values  shown  in  column 
eleven. 

Power,  heat  and  light,  column  twelve,  are  all  con- 
sidered together,  and  this  seems  logical  in  the  case  of 
a  small  shop.  The  total  expense  of  these  items,  in- 
cluding space  charge,  depreciation,  etc.,  divided  by 
the  total  horsepower  hours  developed  (see  bottom  of 
columns  nine  and  twelve),  gives  the  cost  per  horse- 
power hour  as  three  cents,  nearly,  and  multiplying 
the  items  in  column  nine  by  this  rate  gives  the  amounts 
listed  in  column  twelve. 

Columns  thirteen,  fourteen  and  fifteen  list  the  re- 
spective items  of  repairs  to  machinery,  repairs  to 
small  tools,  and  general  labor  *  and  supplies  that  are 
chargeable  against  each  center.  These  items  can  be 
allocated  by  judgment  until  such  time  as  accurate  rec- 
ords can  be  obtained,  care  being  taken  that  the  total  of 
each  kind  of  expense  is  covered  by  the  allotment.  In 
small  shops  these  items  can,  no  doubt,  be  apportioned 
accurately  enough  by  judgment. 

The  totals  of  the  items  in  columns  ten,  eleven, 

1  In  using  the  phrase  "general"  labor  the  author  reproduces  the  table 
as  Mr.  Bunnell  prepared  it.  The  author  prefers  the  expression  "in- 
direct" labor. 


PRODUCTION  CENTERS  191 

twelve,  thirteen,  fourteen  and  fifteen  opposite  each 
unit,  are  then  totaled  and  carried  to  column  sixteen. 
These  totals  in  column  sixteen  represent  the  monthly 
cost  of  operating  each  unit.  Dividing  correspond- 
ing items  by  the  estimated  number  of  hours  of  opera- 
tion gives  the  hourly  rates  listed  in  column  seventeen. 
All  remaining  items  of  expense  not  provided  for  are 
converted  into  a  monthly  total  and  divided  by  the 
total  hours  worked  by  all  productive  units,  giving 
a  rate  of  three  cents  per  hour  for  every  production 
hour,  as  indicated  in  column  eighteen.  This  sup- 
plementary amount,  added  to  the  corresponding  items 
in  column  seventeen,  gives  the  total  burden  rate  which 
should  be  charged  for  the  use  of  each  productive  unit. 
It  is  evident  that  these  rates  are  only  approxi- 
mately accurate.  It  will  be  logical  and  much  more 
convenient,  therefore,  to  express  them  in  even  figures. 
Furthermore,  it  will  be  more  convenient  if  all  rates 
which  are  nearly  alike  are  grouped  together  and  an 
average  rate  taken  for  the  group ;  in  this  manner  the 
number  of  rates  is  reduced.  This  has  been  done  in 
the  above  example,  and  column  nineteen  gives  the 
final  readjusted  rates.  It  will  be  noted  that  some 
of  the  smaller  rates  have  been  increased  to  make  them 
carry  a  little  more  of  the  burden,  and  all  rates  have 
been  rounded  off  so  as  to  make  computations  simpler, 
and  also  so  as  to  make  as  few  groups  of  rates  as  possi- 
ble. If  it  is  desired,  these  groups  may  be  designated 
by  letters  and  each  unit  may  be  given  the  letter  cor- 
responding to  the  group  in  which  its  rate  is  found, 

XII— 14 


il92  COST  FINDING 

The  time  cards  sent  in  from  each  center  may  then 
bear  the  letter  identifying  the  rate  assigned  to  it; 
in  this  way  the  computation  of  the  expense  charge- 
able against  each  job  is  greatly  facilitated.  The  op- 
eration of  the  plan  then  becomes  identical  with  the 
operation  of  any  machine  rate  with  the  supplementary 
rate,  but  obviously  the  results  produced  are  much 
more  intelligent.  This  illustration,  while  it  does  not 
possess  the  refinements  of  the  complete  plan  as  out- 
lined by  Mr.  Church,  is  very  useful  in  showing  how 
the  method  may  be  modified  to  suit  small  shops,  or 
other  plants,  where  a  compromise  must  be  made. 
With  all  the  modifications  and  approximations  sug- 
gested it  is  evident  that  costs  obtained  by  this  method 
will  be  much  more  equitable  than  those  obtained  by 
the  averaging  methods. 

15.  Inherent  difpcnilties  and  errors  in  applying 
'Tnodern  machine  rates. — The  manifest  advantages  of 
this  method  are  offset,  to  some  extent,  by  the  great 
amount  of  preliminary  work  and  study  necessary  to 
instal  the  method  in  plants  of  large  size  or  complex 
character.  If  the  plant  is  built  and  laid  out  with  the 
cost-finding  problem  in  mind,  the  work  will  be  greatly 
lessened,  and  there  is  no  doubt  that  this  feature  of 
factory  management  will  influence,  in  no  small  de- 
gree, the  construction  and  arrangement  of  future  in- 
dustrial plants  where  many  and  varied  products  are 
to  be  made.  The  application  to  complex  existing 
plants  is  difficult,  as  before  noted,  and  can  be  accom- 
plished only  by  a  hberal  use  of  good  judgment. 


PRODUCTION  CENTERS  193 

Nevertheless,  as  has  been  pointed  out,  ev^en  these  diffi- 
culties are  not  insuperable  in  most  cases. 

Moreover,  in  comparing  the  accuracy  of  the  dis- 
tribution of  expense  by  this  method  with  that  of  the 
averaging  methods,  it  should  be  noted  that  some  of 
the  production  factors  of  the  new  method  are  them- 
selves based  on  averages.  Thus,  buildings  are  not 
heated  and  lighted  equally  all  the  year  round,  repairs 
on  all  kinds  of  apparatus  are  not  proportional  to 
elapsed  time,  and -expense  material  may  be  bought 
one  day  that  may  not  be  used  for  several  months. 
These  variable  factors  of  expense  must  be  spread  out 
over  more  or  less  arbitrary  periods  of  time,  if  costs 
are  to  be  consistent.  Again,  the  expenses  that  have 
been  incurred  during  the  time  a  job  has  been  under 
construction  are  not  always  definitely  known.  If  all 
jobs  could  be  started  on  the  first  day  of  the  month 
and  shipped  on  the  last  day,  it  might  be  possible  to 
allocate  with  some  degree  of  accuracy  the  identical 
expense  incurred  by  each  job.  Evidently,  such  con- 
ditions seldom,  if  ever,  exist.  Work  must  be  started 
whenever  necessary,  and  shipped  and  billed  as  soon 
as  possible,  and  both  production  factors  and  supple- 
mentary rates  must,  in  general,  be  based  on  previous 
performances.  Usually  the  record  of  the  previous 
month  is  used  for  rate-setting,  but  some  expenses 
may  have  to  be  distributed  over  longer  periods  to  pre- 
vent costs  from  being  erratic.  Any  claims  for  great 
accuracy  made  by  the  advocate  of  any  method  of 
distributing  expense  should  be  discounted  liberally. 


194  COST  FINDING 

unless  the  conditions  are  so  simple  that  the  inter- 
pretation of  all  the  factors  involved  can  be  clearly 
seen. 

An  objection  often  urged  against  machine  rates, 
in  general,  is  the  penalizing  effect  on  small  work 
which  is  done  on  a  large  machine.  It  often  occurs, 
especially  when  work  is  scarce,  that  work  is  done  on 
a  machine  considerably  larger  than  is  actuall^'^  re- 
quired for  the  process.  Under  the  machine-rate 
method  of  distributing  expense,  the  job  so  done  re- 
ceives a  much  larger  share  of  expense  than  if  done  on 
a  tool  exactly  suited  to  the  operation;  thus  the  job 
is  penahzed  more  heavily,  perhaps,  than  the  market 
price  can  bear.  Furthermore,  most  records  so  made 
are  misleading,  if  not  properly  interpreted,  and  if 
used  for  future  estimates  they  are  likely  to  make  the 
quotations  too  high. 

While  all  this  is  true,  the  fact  remains  that  the 
costs  obtained  by  this  machine-rate  method  are  closer 
to  the  truth  than  those  obtained  by  averaging  methods, 
which  make  no  distinction  in  regard  to  the  varying 
size  and  cost  of  the  equipment  employed.  The  ma- 
chine rate  is  in  this  respect  an  index  of  the  efficiency 
of  operation  and  may  serve  to  call  the  attention  of 
the  manager  either  to  a  weakness  in  his  manufactur- 
ing equipment  or  to  the  pressing  need  of  more  work 
of  certain  kinds.  This  may  be  particularly  true  in 
dull  times;  for  in  such  times  the  large  machines  and 
processes  which  normally  distribute  a  large  part  of 
the  expense  because  of  their  higher  machine  rates 


PRODUCTION  CENTERS  195 

are  usually  the  first  to  become  idle  as  business  falls 
off,  and  the  last  to  resume  operations  as  business  re- 
vives. 

This  particular  feature  of  factory  work,  however, 
is  the  cause  of  one  of  the  most  difficult  of  all  cost- 
finding  problems  in  factories  where  there  is  a  wide 
variation  in  the  cost  and  size  of  equipment,  and  where 
several  lines  of  product  are  made.  This  problem  will 
be  discussed  in  some  detail  in  the  next  chapter. 

REVIEW 

What  do  you  understand  the  term  "production  center"  to  mean? 

If  a  manufacturing  company  owns  its  plant-land,  and  maintains  a 
power-plant  building,  an  office  building,  a  factory  and  a  warehouse, 
what  would  be  the  production  factors  and  of  what  would  the  ele- 
ments of  each  factor  consist  ? 

What  are  the  defects  of  and  objections  to  production  factors  and 
the  supplementary  rate  ? 

Could  you  prepare  without  reference  to  the  text  a  set  of  instruc- 
tions to  a  cost  clerk  explaining  in  detail  the  method  of  operating 
controlling  accounts  for  expense? 

What  is  the  basis  for  the  distribution  of  each  of  the  production 
factors  ? 


CHAPTER  XII 

EFFECT  OF  VOLUME  OF  WORK  ON  EXPENSE 
DISTRIBUTION 

1.  Variation  of  expense  with  volume  of  work. — It 
is  a  fundamental  principle  in  all  the  methods  of  dis- 
tributing expense  that  have  been  discussed,  that  the 
total  manufacturing  expense  should  be  kept  con- 
stantly distributed  in  the  costs  as  fast  as  it  accrues. 
The  only  exception  to  this  principle  that  has  been 
noted,  is  in  the  case  of  heavy  periodic  expenses  like 
taxes,  heavy  repair  expenses,  or  purchases  of  large 
quantities  of  supplies,  like  coal,  for  example,  where 
such  periodic  expenses  are  distributed  over  the  entire 
year  by  means  of  suspense  accounts  (see  Section  3, 
Chapter  VII).  If  the  amount  of  these  periodic  ex- 
penses that  is  thus  distributed  is  considered  as  belong- 
ing to  the  week  or  month  to  which  it  is  assigned,  the 
general  principle  noted  in  the  foregoing  treatment 
holds  strictly  true  for  all  of  the  methods  discussed. 

It  appears,  therefore,  that  where  this  procedure  is 
followed,  the  cost  of  production  of  any  given  article 
will  vary  as  the  volume  of  business  passing  thru  the 
factory  changes,  since  expenses  do  not  vary  propor- 
tionally with  the  volume  of  production  (see  Section  2, 
Chapter  VII) .     A  considerable  increase  can  be  made 

196 


VOLUME  AND  EXPENSE  DISTRIBUTION     197 

in  the  volume  without  necessitating  much,  if  any,  ad- 
dition to  many  expense  items ;  while,  on  the  other  hand, 
a  considerable  decrease  may  occur  in  the  volume  of 
work  without  lessening  many  of  the  expenses,  and,  in 
fact,  before  it  is  possible  to  reduce  them  to  any  great 
extent.  Therefore,  where  all  expense  is  distributed 
as  it  accrues,  a  rise  in  the  volume  of  product  results  in 
a  decrease  in  manufacturing  costs ;  while  a  decrease  in 
the  volume  results  in  an  increase  in  cost.  The  phe- 
nomenon is  only  too  familiar  to  all  who  have  had  ex- 
perience in  factory  supervision. 

2.  Illogical  increase  in  expense. — When  a  factory 
is  running  at  normal  capacity,  and  care  has  been  ex- 
ercised to  allocate  the  burden  to  each  article,  in  pro- 
portion to  the  use  that  has  been  made  of  the  facilities 
of  the  shop  in  producing  it,  the  comparative  costs  of 
all  articles  should  be  fair  and  logical.  If  the  output 
is  increased,  and  all  costs  of  production  decreased,  no 
line  of  production  can  suffer  thereby.  But  should 
the  volume  decrease,  the  case  is  different.  Suppose, 
for  instance,  that  the  volume  decreases  so  that  all  the 
large  tools  are  idle  and  the  lines  of  product  on  which 
they  are  normally  used  are  no  longer  produced.  Un- 
der all  of  the  methods  of  expense  distribution  that 
have  been  discussed,  the  expense  incident  to  these 
large  tools  when  idle  is  distributed  against  lines  of 
product  that  make  no  use  of  these  machines.  This 
is  true  even  in  the  production-center  and  supplemen- 
tary-rate method,  the  supplementary  rate  being  in- 
troduced for  the  very  purpose  of  collecting  expenses 


198  COST  FINDING 

due  to  idleness  and  distributing  them  over  the  product 
in  process. 

Logically,  it  would  seem  that  any  product  should 
bear  only  the  expense  incident  to  its  fabrication. 
Thus,  if  a  manufacturer  owned  several  factories  sit- 
uated in  different  towns,  he  would  not  think  of  dis- 
tributing the  expense  incident  to  a  factory  that  hap- 
pened to  be  idle  against  the  cost  of  production  in 
the  factories  that  were  operating.  There  would  seem 
to  be  no  reason  for  doing  so,  even  if  the  factories  were 
situated  in  the  same  yard  and  were  operated  under  the 
same  superintendent.  By  similar  reasoning,  in  a 
factory  consisting  of  several  independent  continuous 
processes,  it  would  not  appear  to  be  logical  to  charge 
the  expense  incident  to  an  equipment  that  was  idle 
against  those  that  were  operating.  In  factories  of  the 
intermittent  type,  operating  on  mixed  work  involving 
a  large  variety  of  sizes,  such  clear-cut  distinctions  as 
those  noted  in  the  foregoing  examples  are  usually  not 
possible,  since  it  is  difficult,  in  such  plants,  to  segre- 
gate work  and  equipment  into  classes.  Yet  the 
principle  involved  is  so  important  as  to  merit  special 
attention. 

3.  Errors  in  costs  under  averaging  metJwds. — The 
degree  of  errors  in  the  costs  under  the  averaging 
methods  of  distributing  expense  will,  because  of  vari- 
ation in  the  volume  of  work,  depend  on  circumstances. 
If  the  machines  and  equipment  do  not  vary  greatly 
in  value  small  variations  in  the  volume  of  business 
will  not  introduce  serious  errors  in  the  costs  because 


VOLUME  AND  EXPENSE  DISTRIBUTION     199 

of  idle  machinery.  In  departments  where  there  is 
considerable  difference  in  the  size  and  cost  of  equip- 
ment, however,  the  error  thus  introduced  into  the 
costs  may  be  very  great.  This  is  especially  true  in 
such  cases  for  the  reason  that  when  the  volume  of 
work  diminishes  the  larger  and  more  expensive  equip- 
ment is  the  first  to  be  left  without  work  and  it  is  also 
the  last  to  resume  operations  as  business  improves. 
Since  the  fixed  expense  belonging  to  the  larger  equip- 
ment is,  in  general,  much  larger  than  th(^t  belonging 
to  the  smaller  machines,  the  latter  may  have  an  ex- 
pense burden  laid  upon  them  which  is  prohibitive  to 
sales.  And  even  when  the  equipment  does  not  vary 
greatly  in  size  or  value,  and  there  is  a  marked  de- 
crease in  volume  of  business,  considerable  illogical 
distribution  results  with  the  averaging  methods  of  ex- 
pense distribution. 

4.  Errors  in  costs  under  the  supplementary  rate. — 
It  will  be  noted  that  the  production-center  method 
aims  to  allocate  all  expenses  to  each  machine  and 
process  in  such  a  way  as  to  make  it  possible  to  charge 
every  piece  of  work  in  proportion  to  the  use  it  makes 
of  the  manufacturing  facilities.  So  far  as  this  alloca- 
tion is  concerned,  the  production-center  method  is 
in  accord  with  logical  expense  distribution;  but  the 
supplementary  rate  is  not  logical,  in  so  far  as  it  dis- 
tributes expenses  belonging  to  one  machine  or  proc- 
ess against  the  cost  of  operating  some  other  machine 
or  process.  The  defense  of  such  a  procedure  in  con- 
nection with  the  supplementary  rate  is  the  same,  of 


200  COST    FINDING 

course,  as  that  made  for  the  averaging  methods, 
namely,  the  assumed  necessity  of  distributing  all  ex- 
pense as  fast  as  it  accrues.  It  is  held  by  some  that 
this  necessity  does  not  exist,  and  that  such  complete 
distribution  may  often  be  bad  cost  accounting,  since, 
when  the  volume  of  work  is  greatly  decreased,  this 
procedure  may  make  the  cost  of  the  product  that  is 
in  process  so  high  as  to  make  selling  prohibitive. 

5.  Responsibility  for  costs. — It  was  shown  in 
Chapter  III  that  one  of  the  fundamental  functions  of 
a  cost  system  is  to  show  clearly  the  expense  items  for 
which  each  departmental  head  is  responsible,  and,  fol- 
lowing this  procedure,  it  is  customary  to  hold  the 
factory  superintendent  responsible  for  manufactur- 
ing expense.  It  does  not  seem  fair,  however,  to  hold 
the  manufacturing  superintendent  responsible  for  ex- 
penses due  to  idle  equipment  since  he  is  in  no  way  to 
blame  for  such  idleness;  nor  does  it  seem  fair  to  in- 
clude the  expense  of  idleness  in  current  costs  since 
obviously  they  confuse  and  distort  such  costs  with 
changing  volume  of  business.  It  has  been  advocated, 
therefore,  that  the  expense  distributed  against  any 
product  should  be  strictly  proportional  to  the  use  it 
has  made  of  the  manufacturing  facilities;  and  that 
any  other  expense  belonging  to  any  other  product  or 
equipment  should  be  disposed  of  in  some  other  man- 
ner. It  may  be  of  interest  to  review  briefly  the  sev- 
eral plans  that  have  been  suggested  to  obviate  this 
difficulty. 

6.  Mr.  Gantfs  solution. — Mr.  H.  L.  Gantt,  dis- 


VOLUME  AND  EXPENSE  DISTRIBUTION      201 

cussing  this  problem  in  an  interesting  paper  *  pre- 
sented before  the  American  Society  of  Mechanical 
Engineers,  argues  that  "the  indirect  expense  charge- 
able to  the  output  of  a  factory  bears  the  same  ratio  to 
the  indirect  expense  necessary  to  run  the  factoiy  at 
normal  capacity,  as  the  output  in  question  bears  to  the 
normal  output  of  tlie  factory."  That  is,  if  the  pro- 
duction falls  to,  say,  one-half  the  normal  volume,  this 
production  sliould  be  burdened  with  ordy  one-half  the 
normal  expense  so  that,  everything  else  remaining  the 
same,  the  manufacturing  costs  would  not  change  with 
change  in  volume  of  product.  The  undistributed 
expense  would  be  charged  to  the  profit  and  loss  ac- 
count. Granting  that  proportional  distribution  is 
correct  in  theory,  Mr.  Gantt's  statement  is  strictly 
logical  only  when  the  decrease  in  volume  of  product 
is  brought  about  by  the  complete  suspension  of  pro- 
duction in  some  lines,  while  the  remaining  lines  are 
continued  at  normal  volume.  Mr.  Gantt's  theory 
will  hold  approximately  true  also  for  moderate  de- 
crease in  all  lines.  But  if  a  great  decrease  in  volume 
takes  place  in  all  lines,  which  often  happens,  a  rise 
in  productive  prices  will  result  from  causes  which  lie 
in  the  nature  of  the  expense  itself  that  rightly  belongs 
to  every  line.  As  explained  in  Section  2,  Chapter 
VII,  expense,  in  general,  does  not  vary  directly  with 
volume  of  output,  but  becomes  greater  in  proportion 
as  the  volume  decreases,  since,  in  practically  all  ex- 

1  S«e   Journal   of   the   American   Society   of   Mechanical   Engineer*, 
August,  1915,  p.  466. 


202  COST  FINDING 

pense,  there  is  an  irreducible  minimum  that  must  be 
cared  for,  no  matter  how  small  the  output  may  be. 
There  is  therefore  a  minimum  volume  of  product  that 
can  be  manufactured  profitably,  and  beyond  which  it 
may  be  disastrous  to  continue. 

7.  Fixed  and  variable  expense. — The  characteris- 
tics of  expense  that  have  just  been  referred  to  should 
be  carefully  noted  since  they  have  a  large  bearing  on 
the  question  under  consideration.  As  has  been  ex- 
plained in  Section  2,  Chapter  VII,  expense  is  of  two 
kinds,  namely,  fixed  and  variable.  Fixed  expense 
is  that  due  to  the  existence  of  the  enterprise  and  it 
does  not  vary  in  value  to  any  marked  degree  for  any 
given  equipment.  The  value  of  fixed  expense  can 
never  become  zero  and  there  is  an  irreducible  minimum 
value  below  which  it  cannot  fall.  Variable  expense 
on  the  other  hand  may  vary  from  zero  thru  a  wide 
range,  depending  on  the  volume  of  business  that  is 
transacted.  An  investigation  of  a  number  of  fac- 
tories by  Mr.  N.  T.  Ficker  indicated  that  fixed  or 
constant  expense  averaged  40  per  cent  of  the  total 
expense  during  normal  operating  conditions.  The 
effect  of  constant  expense  in  distorting  the  costs  in- 
creases, therefore,  as  the  volume  of  work  diminishes. 
It  should  be  noted  that  the  expense  that  is  distributed 
by  the  supplementary  rate  is  composed  principally 
of  fixed  expense,  and  therefore  if  there  is  much  error 
in  estimating  the  probable  time  of  operation  of  the 
several  machines  and  processes  the  supplementary 
rate  may  greatly  distort  the  costs  in  dull  periods. 


VOLUME  AND  EXPENSE  DISTRIBUTION     209 

8.  Mr.  Ficker's  solution. — With  these  characteris- 
tics of  expense  in  mind  Mr.  Ficker  ^  has  proposed 
that  "the  expense  chargeable  against  the  shop  should 
be  that  portion  of  the  constant  expense  which  the  cur- 
rent activity  is  of  the  normal  activity,  plus  the  actual 
current  variable  expense."  That  is,  if  the  activity 
of  the  enterprise  for  a  given  time  is  found  to  be  70 
per  cent  of  the  normal  activity,  the  expense  vi^hich 
should  be  charged  against  the  manufacturing  or  pro- 
ducing department  should  be  70  per  cent  of  the  con- 
stant expense  in  normal  times,  plus  the  actual  vari- 
able expense  that  is  justly  chargeable  against  the 
actual  productive  operations  for  the  period.  Mr. 
Ficker's  plan  appears  to  be  very  logical  tho  there  are 
some  aspects  of  the  matter  that  should  be  considered 
further.  Mr.  Ficker  would  carry  all  undistributed 
expense  to  a  separate  account  and  dispose  of  it  either 
by  discharging  it  thru  the  costs  during  periods  when 
the  manufacturing  activity  was  above  normal  or  by 
charging  it  to  profit  and  loss. 

In  judging  of  the  merits  of  this  plan  it  should  be 
remembered  that  under  any  of  the  averaging  methods 
of  expense  distribution  the  entire  expense,  fixed  and 
variable,  is  charged  against  current  production.  But 
the  supplementary  rate  burdens  current  production 
only  with  that  fixed  expense  that  is  not  distributed 
because  of  error  in  estimating  the  machine  rate.  If 
the  estimated  time  of  operation  of  each  machine  and 

1  See  "Shop  Expense  Analysis  and  Ck)ntrol",  by  Nicholas  T.  Ficker, 
p.  129. 


204  COST  FINDING 

process  agrees  closely  with  the  actual  periods  of 
operation  the  machine  rate  will  absorb  the  fixed  ex- 
pense belonging  to  each  machine,  and  a  large  part  of 
the  variable  charges ;  and  the  error  introduced  into  the 
costs  because  of  decrease  of  business  may  not  be  great 
under  this  method.  The  great  difficulty  in  operating 
the  supplementary  rate  is  in  estimating  accurately 
the  periods  of  operation,  keeping  in  mind  great  peri- 
ods of  depression  in  business.  For  this  reason  there 
will  probably  be  periods  in  every  business  when  there 
will  be  a  considerable  amount  of  undistributed  ex- 
pense that  does  not  logically  belong  to  current  pro- 
duction but  which  must  be  accounted  for  in  some  man- 
ner. 

9.  Disposition  of  undistiihuted  fixed  expense. — 
Two  methods  of  solving  the  problem  of  undistributed 
expense  have  been  proposed  in  the  foregoing.  The 
first  plan  is  to  carry  all  expenses  due  to  idleness, 
directly  to  the  profit  and  loss  account  and  charge  them 
off  as  a  loss  against  the  business.  The  error  in  the 
reasoning  which  is  back  of  this  plan  is  that  it  assumes 
that  all  expense  due  to  idleness  is  irrecoverable,  an 
assumption  that  is  not  necessarily  true.  A  machine 
may  be  indispensable  and  yet  be  idle  a  considerable 
portion  of  the  time,  and  the  expense  charge  for  the 
machine  should  be  set  so  as  to  discharge  the  total 
yearly  expense  over  the  production  for  that  period. 
If  expenses  due  to  idleness  are  carried  to  the  profit- 
and-loss  account,  the  corresponding  expense  that  is 
discharged  when  the  machine  is  in  operation  should 


VOLUME  AND  EXPENSE  DISTRIBUTION     205 

also  be  carried  to  the  same  account  as  a  credit,  if  the 
usefulness  of  the  machine,  and  of  the  line  of  product 
produced  upon  it,  is  to  be  judged  correctly. 

The  other  plan  is  to  carry  all  expense  to  an  expense 
account  and  distribute  it  by  one  of  the  averaging 
methods  discussed  in  Chapter  X,  but  to  adjust  the 
rate  of  distribution  according  to  the  experience  of 
an  entire  year,  at  least,  instead  of  according  to  the 
records  of  the  preceding  month.  The  expense  ac- 
count, therefore,  will  act  as  a  reservoir,  discharging 
more  of  the  expenses  in  busy  periods  and  fewer  of 
them  in  dull  times.  It  will,  of  course,  also  equalize 
periodic  expenditures,  such  as  taxes,  etc.  If  the  rate 
of  discharge  is  accurately  set  the  entire  expense  should 
be  discharged  at  the  end  of  the  period  for  which  the 
rate  of  discharge  is  computed.  Should  there  be  an 
undistributed  balance  in  the  account  at  the  end  of 
the  fiscal  year,  it  can  be  carried  to  profit  and  loss,  or 
it  can  be  carried  forward  into  the  next  period  and  the 
rate  can  be  adjusted  so  as  to  distribute  it  over  that 
period.  While  this  method  provides  for  distributing 
all  the  expense  without  great  danger  of  unduly  over- 
burdening production  during  dull  times,  it  is,  of 
course,  open  to  the  same  objections  that  have  been 
urged  against  all  averaging  methods  (see  Section  10, 
Chapter  X). 

It  would  appear,  however,  that  an  intelligently 
computed  machine  rate,  like  that  discussed  in  Section 
13,  Chapter  X,  in  connection  with  a  supplementary 
rate  based  on  a  long  period  of  time,  would  do  mueh  to 


206  COST  FINDING 

solve  this  perplexing  problem.  The  machine  rate 
would  distribute  all  expenses  that  are  attached  to  the 
machine,  or  process,  in  proportion  to  the  use  that  is 
made  of  it,  irrespective  of  the  volume  of  product. 
The  bulk  of  the  costs  would,  therefore,  be  proportion- 
ally distributed  except  in  periods  of  great  depression 
when,  as  has  been  noted,  practically  any  method  is 
of  doubtful  accuracy.  The  supplementary  rate,  con- 
taining the  expense  due  to  idle  time,  would  be  equal- 
ized not  only  over  processes,  but  also  over  periods  of 
prosperity  and  of  depression ;  thus  the  danger  of  over- 
burden during  dull  periods  would  be  obviated.  This 
method  possesses  many  virtues  that  recommend  its 
trial  in  practical  cases  where  machine  rates  are  ap- 
propriate. 

10.  The  problem  of  the  manager, — Furthermore 
it  should  be  remembered  that  while  the  costs  should 
be  logical  and  should  be  just  to  the  manufacturing 
organization,  the  manager  has  the  task  of  making  the 
business  pay  dividends.  It  must  be  remembered  that 
any  expense  that  is  not  included  in  costs  and  recovered 
in  the  sales  price  is  a  loss.  Expense  cannot  be  car- 
ried to  some  account  and  disposed  of,  any  more  than 
it  can  be  safely  forgotten.  Entirely  aside  from  any 
logical  principles  of  expense  distribution,  expediency 
would  dictate  that  as  much  expense  as  possible  be 
buried  in  the  sales  price,  regardless  of  the  origin  of 
these  expenses.  It  would  be  obviously  foolish,  how- 
ever, to  overburden  an  active  line  of  production  with 
the  expense  of  inactive  lines  to  such  an  extent  that 


VOLUME   AND   EXPENSE    DISTRIBUTION     207 

sales  would  be  impossible;  this  would  seem  to  be 
the   only   danger   from   a   procedure    of   this   kind. 

In  any  case,  therefore,  the  manager  should  have 
constantly  before  him  a  statement  of  all  undistributed 
expense.  If  he  can  dispose  of  some  of  it  by  raising 
the  prices  of  active  lines  of  work  and  still  retain  his 
market,  no  reasonable  objection  can  be  raised  to  doing 
so.  If  market  prices  forbid  such  a  procedure  he  will 
be  constantly  reminded  of  the  necessity  of  increasing 
his  sales  to  the  point  where  this  undistributed  expense 
will  be  absorbed  in  costs.  Only  when  these  efforts 
fail  should  undistributed  expense  be  carried  to  profit 
and  loss,  and,  obviously,  if  enough  of  such  expense  is 
thus  disposed  of,  the  business  will  become  insolvent. 

The  entire  question  of  variation  of  expense  burden 
with  change  in  volume  of  product  is  interesting,  tho 
complex.  It  is  unwise  to  make  sweeping  generaliza- 
tions regarding  a  solution ;  in  fact,  it  is  unwise  to  gen- 
eralize regarding  any  problems  in  cost  finding.  This 
phase  of  cost  finding,  which  has  just  been  discussed, 
will  bear  close  inspection  by  managers  whose  volume 
of  production  varies  markedly. 

REVIEW 

What  is  the  effect  of  decreased  production  upon  costs?  How 
would  decreased  production  affect  a  factory  with  several  independent 
continuous  processes  ? 

How  would  you  deal  with  the  problem  of  idle  time  in  a  factory  ? 

What  are  the  salient  features  of  the  different  methods  of  disposing 
of  undistributed  fixed  expense  ? 

Why  should  the  manager  of  a  factory  be  especially  concerned  with 
the  analysis  of  exi)ense  ? 

XII— 15 


CHAPTER  XIII 

Other  features  of  expense  distribution 

1.  Basis  of  expense  distribution. — It  will  be  evident 
that  many  enterprises  cannot  introduce  such  compre- 
hensive methods  of  expense  distribution  as  have  been 
described  in  connection  with  the  production-center 
method  in  Chapter  XI.  Furthermore,  as  has  been 
noted,  there  are  many  places  where  such  detailed 
methods  are  not  necessary  and  where  simpler  sys- 
tems will  suffice.  There  are  several  points,  however, 
that  are  made  very  clear  by  the  discussion  of  pro- 
duction centers  that  apply  to  all  methods  of  expense 
distribution. 

Thus  it  is  made  clear  that  the  correct  basis  of  dis- 
tribution of  rent,  insurance,  taxes,  repairs  and  de- 
preciation is  time.  It  is  clear,  also,  that  such  ex- 
penses as  power,  light  and  heat  when  applied  to  actual 
productive  operations  are  logically  distributed  on  a 
time  basis  thru  a  machine  rate.  But  it  is  shown  that 
expense  involved  in  handling,  storing  and  transport- 
ing material  in  the  factory  should  be  distributed,  not 
on  a  time  basis,  but  according  to  bulk  or,  since  bulk 
is  difficult  to  measure,  by  weight  which  approxinjates 
bulk.  It  should  be  noted  in  this  connection  that  heat, 
light  and  power  may  be  necessary  in  this  transporta- 

208 


FEATURES  OF  EXPENSE  DISTRIBUTION      209 

tion  factor,  so  called,  and,  therefore,  those  parts  of 
these  expenses  that  belong  to  the  transportation  factor 
should  be  carefully  separated  from  those  that  belong 
to  productive  activities  since  the  basis  of  distribution 
is  different. 

2.  Application  to  averaging  methods. — Such  segre- 
gation of  expense  as  has  just  been  indicated  is  in- 
herent in  the  production-center  method  but  the  gen- 
eral principles  involved  are  applicable  to  other  and 
simpler  methods.  Thus  in  distributing  expense  by 
the  percentage-on-labor  method  it  is  illogical  to  in- 
clude the  storeroom  labor  and  transportation  expense 
in  such  distribution  but  the  latter  should  logically  be 
applied  in  an  independent  manner  on  the  basis  of 
weight.  This  procedure  would  separate  all  factory 
expense  into  two  parts  on  the  basis  of  the  method 
of  distribution.  Following  Mr.  Church's  nomen- 
clature in  Chapter  XI  these  divisions  may  be  called 
production  expense  and  transportation  expense. 
Mr.  Pricker  has  used  the  terms  machine  expense  and 
material  expense  to  denote  these  divisions. 

The  content  of  transportation  expense  should  be 
carefully  noted.  As  outlined  in  Section  11,  Chapter 
XI,  this  item  should  include  the  cost  of  storing,  han- 
dling and  transporting  material,  the  wages  of  inspect- 
ors and  storekeepers,  etc.  Logically  it  should  not 
include  such  expenses  as  insurance  and  depreciation 
on  material  since  these  are  not  accurately  distributable 
by  bulk  but  are  based  on  the  value  of  the  material 
and  involve  the  element  of  time.     Such  items  are 


210  COST  FINDING 

best  handled,  perhaps,  by  distributing  them  against 
the  value  of  the  material  before  issuing  it  from  the 
storeroom.     See  also  Section  9,  Chapter  V. 

3.  Application  and  limitations. — Suppose  there- 
fore that  under  the  percentage-on-labor  method  of 
distribution  it  is  found  that  the  production  expense 
is  75  per  cent  of  the  productive  labor  and  that  the 
transportation  expense  is  found  to  be  3^  cent  per 
pound.  A  certain  job  is  found  to  require  $40  of 
direct  labor  and  500  pounds  of  material  worth  2  cents 
per  pound.     The  shop  cost  will  then  be 

Material $10.00 

Transportation  expense 2.50 

Direct  labor 40.00 

Production  expense 30.00 

Total    $82.50 

It  should  be  noted,  however,  that  the  necessity  of 
thus  separating  the  factory  expense  should  be  appar- 
ent before  such  a  step  is  taken.  In  many  factories 
the  transportation  factor  is  a  very  small  one,  and  it 
will  be  sufficient  to  charge  all  storeroom  expenses 
against  the  material  before  issuing  it.  On  the  other 
hand  there  are  industries  such  as  structural  plants 
where  the  transportation  factor  is  so  large  as  to  merit 
the  special  consideration  discussed  in  the  foregoing 
even  under  percentage  methods  of  distribution. 

4.  Verification  of  expense  distribution. — It  was 
shown  in  Section  3  of  Chapter  VII  that  it  is  not  possi- 
ble, generally,  to  allocate  the  actual  expense  that  is 


FEATURES  OF  EXPENSE  DISTRIBUTION      211 

incurred  in  doing  a  given  piece  of  work  but  that  this 
expense  must  be  distributed  on  the  basis  of  past  ex- 
perience. The  percentage  rates  used  in  any  of  the 
averaging  methods  of  expense  distribution  and  the 
machine  rates  of  the  production-center  method  must 
always  be  calculated  on  the  basis  of  values  obtained  in 
some  prior  period  of  production.  Since  conditions 
in  any  enterprise  vary  constantly  it  is  clear  that  all 
distribution  rates  should  be  checked  constantly. 

A  record  should  be  kept,  therefore,  of  all  expense 
distributed  during  the  accounting  period  which  is 
used  as  a  basis  of  calculation,  and  this  should  be 
checked  against  the  estimated  expense  that  has  been 
used  in  setting  distribution  rates,  and  such  adjust- 
ments should  be  made  in  these  rates  as  will  correct  any 
differences  between  the  actual  and  the  estimated  ex- 
pense. The  degree  of  detail  to  which  this  comparison 
may  be  carried  will,  of  course,  depend  upon  circum- 
stances. In  any  of  the  averaging  methods  there  is 
little  use  in  checking  beyond  the  totals  for  each  de- 
partment for  which  a  rate  has  been  set.  In  the  pro- 
duction-center method,  however,  it  may  be  necessary 
to  investigate  and  correct  each  machine  rate  if  accu- 
racy in  the  costs  is  to  be  maintained. 

5.  Continuous-process  costs. — In  continuous  proc- 
esses, or,  in  other  words,  where,  owing  to  the  condi- 
tions of  manufacture,  the  lots  of  material  follow  each 
other  in  such  a  manner  that  the  workmen  cannot  dis- 
tinguish one  lot  from  another,  the  production-order 
method  does  not  apply,  and  the  system  of  arriving 


212  COST  FINDING 

at  cost  must  be  different  from  that  of  the  outline 
given,  tho  the  fundamental  principles  are  the  same. 
A  consideration  of  a  simple  case,  such  as  that  of  a 
cement  mill,  may  make  the  general  method  clear. 
Here  the  material  flows  in  a  continuous  stream  thru 
the  several  processes,  and  the  output  is  more  depend- 
ent on  the  machines  than  on  the  workmen.  The  ma- 
terial, moreover,  passes  thru  all  of  the  machines,  so 
that  the  mill,  so  far  as  finding  total  costs  is  concerned, 
may  be  treated  as  a  single  machine.  The  problem  is 
still  further  simplified  in  this  case  by  the  fact  that 
the  material  in  process  at  any  one  time  is  not  of 
great  value  as  compared  with  the  monthly  output, 
and  therefore  can  be  neglected  in  computing  costs. 
Furthermore,  the  material  passes  thru  the  mill  rap- 
idlj'',  and  at  no  time  is  there  a  large  amount  of  labor 
tied  up  in  material  in  process.  It  is  evident  that 
all  that  is  necessary,  so  far  as  total  costs  are  con- 
cerned, is  to  find  the  total  labor  and  expense  in- 
curred during  a  given  period,  and  divide  this  total 
by  the  output  for  the  same  period;  this  output  may 
be  expressed  in  terms  of  weight  or  bulk;  that  is,  in 
terms  of  pounds  or  barrels.  The  dividend  so  ob- 
tained will  be  the  amount  which  must  be  added  to  the 
material  cost  of  each  unit  of  output  to  cover  the  labor 
and  expense  of  production.  Obviously,  these  com- 
putations can  be  made  more  frequently  than  in  the 
case  of  the  more  complex  production-order  methods. 
6.  Detail-process  costs. — If  it  be  desired  to  know 
the  cost  of  each  process,  or  department,  of  a  continu- 


FEATURES   OF   EXPENSE    DISTRIBUTION     213 

ous-process  industry,  labor  and  expense  costs  must 
be  kept  by  processes  of  departments,  but  they  may  be 
distributed,  as  before,  by  simple  division  on  a  mate- 
rial basis,  and  this  will  indicate  the  general  method 
to  be  pursued  in  more  complex  cases.  It  is  usual  in 
such  cases  to  issue  a  standing-order  number  to  each 
process,  and  to  charge  to  this  number  all  labor  and 
expense,  if  the  latter  can  be  segregated.  The  total 
amount  of  these  items,  for  any  period,  divided  by  the 
total  weight  or  volume  of  all  of  the  manufactured 
product  passed  thru  the  process  for  the  same  period, 
will  give  the  unit  cost  which  must  be  charged  against 
each  unit  of  material  that  has  passed  thru  the  process. 
If  the  expense  cannot  be  allocated  to  each  process, 
the  unit  labor  cost  can  be  ascertained  as  indicated  in 
the  foregoing  treatment,  and  this  cost  can  be  used  as 
a  basis  for  distributing  the  burden  of  expense  to  each 
unit  of  product. 

Thus,  in  a  factory  consisting  of  several  simple  con- 
tinuous processes,  each  process  involving  a  separate 
and  distinct  series  of  machines,  it  would  be  difficult, 
in  general,  to  segregate  accurately  all  of  the  expense ; 
hence  compromise  methods,  like  those  described  in 
Chapter  X,  may  have  to  be  employed  in  such  cases 
for  allocating  the  expense. 

7.  More  refined  process  costs. — The  discussion  in 
Sections  5  and  6  of  this  chapter  assumes  that  the  ma-' 
terial  passes  rapidly  thru  the  process,  or  series  of 
processes,  and  that,  therefore,  the  labor  and  expense 
collected  at  the  end  of  the  week  or  month,  as  the  case 


214>  COST  FINDING 

may  be,  belong,  approximate^  at  least,  to  the  material 
that  has  passed  thru  during  that  period.  If,  now,  the 
time  required  to  pass  the  material  thru  the  process, 
or  series  of  processes,  is  considerable,  this  assumption 
does  not  hold  true,  but  part  of  the  labor  and  expense 
collected  at  the  end  of  the  accounting  period  will  be- 
long to  the  material  that  has  passed  thru,  and  the 
remainder  will  be  chargeable  to  material  in  process. 
The  longer  the  period  of  fabrication,  as  compared  to 
the  accounting  period,  the  more  marked  will  this  con- 
dition be.  If  it  is  necessary  to  take  this  relation  into 
account,  as  it  may  be,  the  cost  accounting  will  in- 
volve keeping  a  record  of  material  that  has  been  issued 
to  the  process  in  question,  and  of  the  amount  that  has 
issued  from  it  during  the  accounting  period,  in  order 
that  at  the  end  of  the  period  the  quantity  remaining 
in  process  may  be  determined.  The  theory  of  this 
method  ^  is  simple,  tho  the  aritlmietic  may  be  some- 
what confusing  in  complex  cases. 

It  should  be  noted,  however,  that  this  refinement 
is  necessary  only  in  extreme  cases.  In  process  pro- 
duction, as  under  the  production-order  method,  goods 
should,  in  general,  be  shipped  as  soon  as  possible  after 
completion.  It  is  not  possible  to  hold  all  the  goods 
manufactured  during  an  accounting  period  till  the. 
end  of  that  period,  so  as  to  be  able  to  compute  ac- 
curately the  cost  of  production;  therefore,  this  cost 
must  generally  be  computed  upon  the  basis  of  expe- 

lA  brief  and  clear  discussion  of  tliis  problem  will  be  found  in  "The 
Science  of  Accounts",  by  H.  Bentley,  p.  237. 


FEATURES  OF  EXPENSE  DISTRIBUTION      215 

rience  in  manufacturing  similar  goods.  It  will  be 
noted,  also,  that  many  expense  items  can  be  allocated 
only  approximately;  and,  where  more  than  one  line 
of  goods  is  in  process,  accurate  allocation  is  as  diffi- 
cult under  the  process-production  system  as  under  the 
production-order  method.  No  definite  rules  can  be 
laid  down  for  these  more  complex  process  methods; 
each  problem  must  be  studied  independently,  indi- 
vidual judgment  entering  largely  into  the  solution  of 
the  problem  involved  in  each  set  of  conditions. 

8.  Other  difficulties  of  process-accounting. — The 
discussion  assumes  that  the  processes  considered  are 
continuous,  and  that  all  the  material  of  each  kind 
passes  thru  the  same  series  of  machines.  If  the 
combination  of  machines  and  processes  varies  from 
day  to  day,  all  the  difficulties  discussed  under  the  pro- 
duction-order method  appear  at  once.  If  this  takes 
place,  even  tho  there  may  be  some  semblance  to  con- 
tinuous production,  it  is  better  to  pass  the  material 
thru  in  lots,  assigning  a  production  order  to  each  lot. 
Even  then,  there  will  be  forms  of  process  production 
that  will  be  troublesome  to  the  cost  finder. 

In  intermittent  industries,  for  instance,  there  are 
processes  which  are  continuous  in  character,  and  which 
use  considerable  expense  material  the  cost  of  which  is 
difficult  to  allocate.  Processes  where  material  is 
dipped  in  insulating  fluid — ^japanning  and  baking 
processes,  etc. — are  instances  of  this  kind.  In  proc- 
esses like  cement-making  it  is  possible  to  weigh  the 
material,  and  to  use  the  weight  as  a  measure  of  labor 


216  COST  FINDING 

and  expense.  But  in  processes  like  those  others  just 
mentioned,  such  a  measure  of  labor  and  of  expense 
material  is  difficult  to  obtain.  Thus,  in  plating  or 
dipping,  the  superficial  area  of  the  material  treated  is 
the  proper  criterion  for  measuring  expense  material, 
and  this  area  is  difficult  to  obtain.  The  expense  ma- 
terial itself  may  be  measured,  but  here  again  more 
than  one  kind  of  product  may  be  treated  at  the  same 
time,  a  condition  which  makes  the  allocation  difficult 
if  not  impossible.  Similar  remarks  apply  to  baking 
processes  where  several  kinds  of  products  may  be 
baked  simultaneouslj^  and  where  the  accurate  alloca- 
tion of  direct  labor  and  indirect  expense  may  be  im- 
possible. No  rules  can  be  laid  down  for  complex 
cases  like  these,  but  a  knowledge  of  correct  principles, 
combined  with  good  judgment,  will  always  indicate 
compromise  methods  that  will  give  results,  accurate 
enough,  without  too  much  complication. 

REVIEW 

How  should  the  transportation  expense  in  a  factory  be 
handled  ? 

What  are  the  salient  features  of  continuous-process  cost  find- 
ing? 

Why  are  continuous-process  costs  easier  to  determine  than  the 
costs  of  intermittent  processes? 

Is  any  advantage  gained  by  passing  material  thru  continuous 
processes  in  lots? 


CHAPTER  XIV 

DISTRIBUTION  OF  ADMINISTRATIVE 
EXPENSE— RESUME 

1.  Distribution  of  administrative  expense. — Ad- 
ministrative expense  and  selling  expense  in  most  fac- 
tories, and  particularly  in  small  factories,  are  treated 
as  one  item,  under  the  name  of  general  expense,  and 
are  usually  distributed  as  a  percentage  on  factory  cost. 
In  many  such  cases  it  is  not  possible  to  make  a  clear- 
cut  division  between  these  two  classes  of  expense,  but 
whenever  possible  they  should  be  treated  independ- 
ently, if  for  no  other  reason  than  to  fix  responsibility. 
In  large  enterprises  it  is  usually  possible  to  segregate 
them,  since  the  sales  organization  of  a  large  works  is 
usually  an  independent  one ;  but  even  here  there  may 
be  items  of  general  superintendence  that  should  be  di- 
vided between  the  two  branches  of  general  expense. 

It  is  difficult  to  distribute  administrative  expense 
over  factory  product  in  proportion  to  services  ren- 
dered, by  any  method  of  allocation.  Where  the  fac- 
tory is  very  large  and  divided  into  departments,  each 
with  its  own  office  force,  an  approach  to  intelligent 
allocation  can  be  made,  but  the  average  factory  is  not 
so  arranged.     The  usual  method  is,  therefore,  to  dis- 

217 


gl8  COST  FINDING 

tribute  the  administrative  expense  as  a  percentage  on 
factory  cost. 

Thus,  if  the  factory  output  for  any  month  is  $50,- 
000  and  the  administrative  expense  for  that  period  is 
$10,000,  the  percentage  by  which  the  factory  cost  of 
each  article  must  be  increased  in  order  to  absorb  the 

,    .   .         .  -11  1     10,000 

admmistrative  expense  will  be =  20  per  cent. 

^  50,000  ^ 

If,  then,  the  shop  cost  of  a  given  machine  is  $200,  its 
cost,  including  administrative  expense,  will  be  $200  + 
$40  =  $240.  The  factory  cost  plus  the  administra- 
tive cost  is  sometimes  called  the  gross  cost. 

2.  Selling  expense. — Selling  expense  is  even  more 
difficult  to  distribute  over  the  product  in  proportion  to 
services  rendered.  In  the  first  place,  selling  has  no 
connection  with  manufacturing.  The  factory  may  be 
in  the  country  and  the  sales  office  may  be,  and  often 
is,  in  the  city.  There  is  no  relation  between  the  two 
branches,  and  hence  there  can  be  no  relation  between 
individual  items  of  selling  expense  and  factory  orders. 
Occasionally,  of  course,  a  salesman  may  do  work  on 
securing  an  order  for  a  particular  machine  and  may 
be  successful.  On  the  other  hand,  he  may  fail  to  se- 
cure it,  and  an  order  for  it  may  come  in  unsolicited 
from  some  other  quarter.  Much  of  the  work  of  the 
salesman  is  "missionarj'^",  or  advertising  work,  and  it 
is  difficult,  often,  to  trace  and  identify  the  results  of 
his  efforts. 

Where  the  enterprise  is  very  large,  and  the  sales 
force  is  divided  into  departments  according  to  the  sev- 


ADMINISTRATIVE    EXPENSE  219 

eral  lines  of  product,  the  cost  of  selling  the  several 
lines  may  be  intelligently  allocated  against  each  line. 
But  here,  again,  there  is  seldom  any  connection  be- 
tween the  cost  of  selling  an  article  in  any  given  line 
and  the  cost  of  producing  it,  the  latter  being  fixed  by 
conditions  that  are  entirely  independent  of  the  cost 
of  selling.  The  best  that  can  be  done,  therefore,  is  to 
distribute  the  selling  cost  as  a  percentage,  just  as  in 
the  case  of  the  administrative  expense. 

The  computation  is  simplified,  of  course,  if  both 
administrative  and  selling  expenses  are  lumped  to- 
gether and  so  distributed,  and  this  procedure  is  cus- 
tomary in  most  plants.  It  should  be  noted,  however, 
that  there  is  no  reason  why  the  details  of  such  expenses 
should  not  be  carefully  segregated  so  that  the  man- 
ager can  see  not  only  the  separated  totals  of  adminis- 
trative and  selling  expense,  but  also  the  important 
details  of  these  expenditures.  Some  suggested  de- 
tails of  these  expenditures  are  given  in  Section  7, 
Chapter  VII,  but  evidently  the  extent  to  which  such 
detail  may  be  logically  carried  will  depend  on  the 
size  and  the  character  of  the  enterprise.  It  is  evident 
that  the  greater  the  proportion  of  the  selling  expense 
that  can  be  definitely  allocated  to  each  product  the 
more  accurate  will  be  the  cost  figures. 

3.  Departmentization. — The  advantages  of  depart- 
mentization  with  reference  to  cost  finding  have  been 
referred  to  several  times  in  the  preceding  discussion; 
it  may  be  helpful  to  note  several  other  aspects  of  this 
feature  of  factory  organization.    From  what  has  al- 


220  COST  FINDING 

ready  been  said,  it  will  be  evident  that  cost  finding  is 
closely  connected  with  factory  management ;  and  yet, 
in  times  past,  little  or  no  attention  has  been  paid  to  the 
problem  of  cost  finding,  either  in  arranging  the  plant 
or  in  organizing  its  personnel.  It  will  appear,  how- 
ever, that  this  question  should  at  least  be  kept  in  mind 
in  perfecting  both  plant  arrangement  and  organiza- 
tion. 

If  a  manufacturer  were  to  engage  in  producing  two 
widely  different  commodities  in  two  factories,  placed 
side  by  side,  he  would  naturally  organize  all  "services" 
for  one  shop  separately,  distinct  from  similar  services 
in  the  other.  He  would  wish  to  keep  his  bills  for 
power,  heat  and  light  separate  for  the  two  shops  and 
would  arrange  his  transmission  machinery  accord- 
ingly. The  bookkeeping  systems  would  be  independ- 
ent of  each  other  and  every  cost  factor  would  be 
strictly  allocated  to  the  factory  to  which  it  belonged. 
The  manufacturer  would  expect  to  be  able  to  keep  the 
records  of  his  two  activities  entirely  separate. 

On  the  other  hand,  a  manufacturer  might  and  often 
does,  produce  articles  of  widely  different  characteris- 
tics in  the  same  factory,  without  any  thought  of  ar- 
ranging either  his  plant  or  his  men  with  a  view  to 
separating,  as  far  as  possible,  the  manufacturing  costs 
of  the  several  items.  Yet  a  careful  consideration  of 
the  cost-finding  problem  would  lead  to  radically  dif- 
ferent methods  of  distributing  heat,  light,  power  and 
similar  services,  and  careful  departmentization,  with 


ADMINISTRATIVE  EXPENSE  22l 

the  cost  problem  in  mind,  would  often  simplify  this 
same  problem. 

The  foregoing  discussion  will  hav^e  made  it  clear 
that  the  problem  of  distributing  factory  expense  in 
any  department  approaches  simple  division  of  such 
expense  as  the  tools  employed  become  more  equal  in 
size  and  value,  as  the  wages  paid  approach  uniformity, 
and  as  the  work  performed  becomes  more  and  more 
uniform  in  size  and  character.  The  problem  of  dis- 
tributing the  expense  over  a  department  containing 
twenty-five  lathes  of  the  same  size  and  value,  operat- 
ing on  exactly  the  same  part,  and  operated  by  men  of 
equal  wage  value  and  productive  capacity,  is  ex- 
tremely simple.  Such  a  group  can  be  considered  as  a 
large  production  center  and  it  is  comparatively  easy 
to  allocate  the  expenses  to  it  in  bulk,  and  simple  divi- 
sion of  this  bulk  is  about  all  that  is  necessary,  if  any  at 
all  is  necessary.  On  the  other  hand,  the  problem  has 
been  shown  to  become  increasingly  complex  as  the 
component  factors  named  vary  increasingly  in  size, 
character  and  value. 

4.  Departmentization  according  to  finished  prod- 
uct.— Now  there  are  two  distinct  methods,  or  prin- 
ciples, for  grouping  machines  and  processes.  These 
affect  very  greatly  not  only  the  physical  arrangement 
of  the  plant,  but  also  its  personal  administration;  and 
the  ease  and  accuracy  with  which  expense  may  be  dis- 
tributed. The  first  method  is  to  group  the  machines 
or  processes  on  the  basis  of  the  character  of  the  firir 


222  COST  FINDING 

ished  product.  Thus,  in  a  large  machine-tool  works 
organized  in  this  manner,  one  department  would  be 
equipped  with  a  complete  set  of  machines  and  tools 
for  building  lathes ;  another  would  be  similarly  fitted 
out  to  build  milling  machines ;  and  another  would  have 
all  the  necessary  appliances  to  build  drill  presses,  and 
so  on,  each  department  being  equipped  entirely  inde- 
pendently of  the  others,  and  being  self-sufficient  for 
the  purpose  for  which  it  was  organized. 

This  method  is  a  natural  outgrowth  of  conditions  in 
a  small  shop  where  the  number  of  tools  of  any  one 
kind  was  limited.  As  new  lines  of  production  were 
added  their  processes  grew  up  around  the  personality 
of  some  strong  executive,  or  manufacturing  superin- 
tendent, who  often  did  not  want  to  assume  the  respon- 
sibility of  production  and  delivery  unless  he  had  full 
control  of  the  major  part  of  the  productive  machinery 
required.  Many  executives  of  strong  personality 
were  impatient  of  the  restraint  imposed  by  the  neces- 
sity of  close  cooperation  between  departments.  The 
result  of  their  influence  was  excessive  duplication  of 
tools  and  processes,  and  the  prevention  of  the  use  of 
more  modern  forms  of  administrative  organization. 
This  failure  to  recognize  the  importance  of  changing 
the  form  of  organization  as  the  enterprise  grows  in 
size,  has  doubtless  been  responsible  for  the  failure  of 
many  once  prosperous  concerns. 

5.  Departmentization  according  to  processes. — 
Modern  organization,  however,  moves  along  different 
lines.     It  tends  to  substitute  staff  organization  for 


ADMINISTRATIVE  EXPENSE  223 

individual  effort,  to  replace  the  versatile  individual 
with  coordinated  specialization,  and  to  arrange  ma- 
chines by  processes  rather  than  by  products.  Under 
this  second  method,  therefore,  all  machines  of  approxi- 
mate size  and  character  are  grouped  together.  Thus, 
in  the  example  taken  above,  all  turning  would  be  done 
in  one  department,  all  milling  in  another,  all  planing 
in  another,  and  all  assembling  in  another.  In  each 
of  these  departments,  in  turn,  all  machines  and  proc- 
esses of  similar  kind  and  size  would  be  grouped  to- 
gether. Thus  all  small  lathes  engaged  in  manufac- 
ture would  be  in  one  group,  all  large  lathes  in  another, 
and  so  on.  Even  in  the  assembling  of  the  completed 
product,  while  all  assembly  might  be  in  one  depart- 
ment, each  class  of  product  would  be  assembled  by 
itself.  In  other  words,  by  this  method  all  similar 
production  centers  would,  as  far  as  possible,  be 
grouped  so  as  to  form  a  large  production  center,  the 
component  parts  of  which  would  not  vary  greatly. 

It  is  evident  that  this  modern  method  is  by  far  the 
most  economical,  and  that  fewer  tools  of  any  given 
kind  will  be  needed,  since  the  possibility  of  keeping 
all  machines  in  operation  is  much  greater  when  all 
tools  of  one  kind,  and  the  work  which  can  be  done 
upon  them,  are  collected  in  one  place.  The  indirect 
expense  for  superintendence  will  be  less,  and  the  vol- 
ume of  the  product  will  be  greater,  since  specializa- 
tion can  be  made  more  effective. 

Both  principles,  organization  on  the  basis  of  prod- 
ucts, and  that  on  the  basis  of  processes,  should  be 

XII— 16 


224  COST  FINDING 

given  careful  attention  in  arranging  the  plant,  espe- 
cially if  cost  finding  is  being  considered.  In  a  very 
large  works,  for  instance,  the  entire  plant  may  be  ar- 
ranged by  products,  certain  definite  buildings  being 
devoted  to  definite  lines  of  work,  so  that  the  total  costs 
of  each  line  may  be  easily  segregated.  The  tools  and 
processes  used  in  each  line  of  work  may,  however,  be 
arranged  to  best  advantage  by  the  other  method ;  that 
is,  according  to  the  processes  performed.  Careful 
consideration  of  the  arrangement  may  make  it  pos- 
sible to  use  a  simple  cost-finding  sj^stem,  whereas  lack 
of  such  consideration  may  make  the  problem  so  com- 
plex that  it  cannot  be  solved  even  by  the  most  elabo- 
rate method.  It  should,  of  course,  be  noted  that  strict 
adherence  to  either  form  of  organization  is  neither 
necessary  nor  indeed  always  possible.  Many  depart- 
ments that  are  equipped  primarily  to  perform  a  given 
process  often  require  a  few  tools  of  entirely  differ- 
ent kinds,  simply  to  save  time  and  transportation. 
While  space  does  not  permit  further  discussion  of  this 
problem,  it  is  one  which  requires  the  careful  attention 
of  the  manager  who  is  interested  in  costs. 

6.  Resurne  of  inethods  of  distributing  expense. — 
The  consideration  of  the  several  methods  of  distribut- 
ing expense  and  the  discussion  in  Chapters  VII  and 
VIII  regarding  the  character  of  its  several  items,  will 
have  made  it  clear  that  exact  allocation  of  factory 
burden  is  not,  in  general,  possible.  It  is  true  that  in 
yery  simple  cases,  such  as  are  found  in  the  continuous 
industries,  the  distribution  may  be  as  accurate  as  is 


ADMINISTRATIVE  EXPENSE  225 

desired,  but  the  general  case  of  intermittent  manufac* 
turing  does  not  admit  of  an  exact  solution.  Even  tho 
clerical  machinery  be  installed  which,  theoretically, 
will  give  accurate  results,  the  expense  items  them- 
selves are  so  variable  as  to  make  exact  distribution 
difficult  even  in  simple  cases,  and  impossible  where  the 
conditions  are  complex.  This  fact  is  made  clear  when 
it  is  considered  that  the  exact  expense  to  be  distrib- 
uted is  itself  not  always  accurately  known;  distribu- 
tion must  be  based  on  records  of  the  past  week,  month, 
or  year,  as  the  case  may  be.  In  most  cases  the  record 
of  the  previous  month  is  used  as  a  basis,  but  it  may  be 
that  in  some  cases  it  will  be  better  to  base  the  distribu- 
tion on  the  average  of  a  number  of  preceding  months. 
In  all  cases,  however,  heavy  periodic  expense  invest- 
ments should  be  spread  out  so  as  to  equalize  the  costs. 
The  fact  that  there  are  so  many  methods  and  theories 
of  distributing  expense  is  perhaps  due,  to  some  extent, 
to  the  fact  that  there  is  no  absolutely  accurate  method. 
The  need  of  some  theory  on  which  to  build  a  system 
of  expense  distribution  is  self-evident,  but  it  is  equally 
plain  that  the  theory  adopted  should  be  capable  of 
practical  application.  The  method  that  will  be  satis- 
factory in  one  case  may  not  do  at  all  in  another. 
There  are,  however,  two  fundamental  principles  that 
should  be  remembered  no  matter  what  system  of  dis- 
tribution is  being  considered. 

First,  the  cost  records  obtained  should  state,  so  far 
as  possible,  the  facts  of  the  case;  they  should  be  rec- 
ords of  events  that  have  happened  and  of  nothing  else. 


226  COST  FINDING 

A  clear-cut  distinction  should  be  made  between  costs, 
as  such,  and  their  interpretation  and  use,  which  is 
another  matter.  Systems  of  cost  based  on  estimates 
are  in  common  use.  Obviously,  such  methods  cannot 
be  considered  seriously,  either  for  accuracy  or  as  a 
guide  for  future  action.  But,  altho  the  primary  ob- 
ject of  a  cost  system  is  to  state  facts,  due  considera- 
tion should  be  given  to  the  use  to  which  these  facts  are 
to  be  put.  In  general,  the  two  main  uses  of  costs  are, 
first,  to  show  how  money  has  been  spent  and,  second, 
to  indicate  how  such  expenditures  may  be  controlled. 
In  organizing  a  cost-finding  system,  therefore,  the 
form  in  which  cost  returns  are  recorded  should  be 
carefully  considered  so  that  classification  and  analysis 
may  be  rendered  easy  and  simple.  A  later  chapter 
will  treat  this  matter  more  fully. 

Second,  the  system  adopted  should  be  as  simple  as 
it  can  be,  and  still  be  consistent  with  the  problem  in 
hand.  The  average  manager  is  a  very  busy  person, 
usually  demanding  methods  that  are  simple  and  easily 
followed  and,  ordinarily,  being  suspicious  of  methods 
that  he  cannot  understand,  or  results  the  derivation  of 
which  he  cannot  easily  see.  Furthermore,  the  system 
should  be  stable  and  not  subject  to  constant  readjust- 
ment because  of  slight  changes  in  operating  condi- 
tions, since  readjustment  usually  destroys  the  possi- 
bility of  comparison  with  costs  already  existing. 

For  these  and  many  similar  reasons  the  cost  system 
adopted  is  usually  a  compromise  which  takes  into  ac- 
count the  surrounding  conditions.     Thus,  it  would  be 


ADIVnNISTRATIVE  EXPENSE  227 

a  useless  expense  to  instal  an  elaborate  machine  rate 
and  supplementary  rate  in  a  continuous-process  in- 
dustry where  a  single  product  is  being  produced  and 
where  a  simple  method  of  percentage  on  material 
would  be  accurate  enough.  Again,  in  an  industry 
making  a  few  lines  of  goods  of  similar  characteristics, 
where  the  parts  do  not  vary  much  in  size,  and  where 
the  machines  are  all  small  and  inexpensive,  a  method 
based  upon  percentage  on  wages  or  upon  hourly  bur- 
den might  give  results  sufficiently  close.  In  more 
complex  cases,  as  in  intermittent  manufacturing, 
where  many  commodities  of  varjnng  size  and  charac- 
ter are  made,  it  has  been  shown  that  these  simpler 
methods  do  not  give  intelligent  results.  If  the  com- 
petition is  keen  the  wise  manager  will  go  as  far  as  he 
can  in  the  direction  of  the  machine  rate  and  the  sup- 
plementary rate.  Even  in  cases  of  this  kind  condi- 
tions may  be  such  as  to  permit  the  use  of  simpler 
methods,  particularly  if  careful  departmentization  can 
be  effected.  The  general  influence  of  departmentiza- 
tion on  costs  should  not  be  lost  sight  of,  since  by  this 
means  all  cost-finding  methods  are  strengthened,  as 
has  been  noted  in  discussing  the  several  methods  of 
distribution.  A  later  section  will  discuss  this  impor- 
tant factor  somewhat  more  fully. 

Above  all,  the  manager  himself  should  have  a  clear- 
cut  view  of  just  what  he  wishes  to  do.  In  general,  the 
practical  manager  must  have  the  help  of  an  expert 
organizer  to  assist  him  in  installing  a  new  system,  but 
he  himself  should  be  able  to  limit  intelligently  the 


228  COST  FINDING 

extent  to  which  the  system  is  carried.  It  is  one  thing 
to  lay  down  general  principles,  and  another  to  know 
how  far  they  can  be  economically  carried.  One  of 
the  most  common  errors  of  cost-finding  experts  who 
are  lacking  in  practical  experience,  is  to  oversystema- 
tize  in  installing  new  cost-finding  systems,  with  the 
result  that  much  useless  information  is  gathered  and 
eventually  much  of  the  elaborate  system  is  discarded. 
The  cost-finding  expert  should  be  master  of  the  prin- 
ciples of  his  business;  the  practical  manager  should 
supply  the  limitations  of  the  system.  And  finally,  it 
is  of  supreme  importance  that  some  system,  be  it  ever 
so  simple,  should  be  in  service.  A  factory  without  a 
cost-finding  system  is  like  a  ship  without  a  rudder, 
and  in  these  days  of  strenuous  competition  it  is  sure 
to  go  on  the  rocks  of  failure. 

REVIEW 

How  would  you  distribute  administrative  expense? 

Upon  what  basis  is  it  advisable  to  distribute  selling  expense? 

If  part  of  the  selling  expense  is  incurred  in  securing  orders  for 
the  next  season's  delivery,  would  you  consider  it  proper  to  carry 
forward  such  portion  as  an  asset  to  be  charged  against  the  next 
season's  sales? 

What  do  you  understand  by  departmentization :  (a)  according 
to  finished  product?  (b)  according  to  processes?  Which  of  these 
methods  is  more  in  accordance  with  modern  ideas  of  organization? 

What  are  the  fundamental  principles  to  be  taken  into  consider- 
ation in  the  planning  of  any  system  of  expense  distribution? 
What  are  the  difficulties  to  be  anticipated? 


CHAPTER  XV 

ASSEMBLING  AND  RECORDING  COSTS 

1.  Uses  of  costs. — It  will  be  evident  that  the  man- 
ner in  which  costs  are  recorded  and  the  detail  with 
which  the  recording  is  carried  out  will  vary  greatly 
with  the  enterprise,  and  with  the  point  of  view  of  the 
manager.  In  some  simple  continuous  processes  lump 
sums  only  may  be  required,  while  in  intermittent  pro- 
duction involving  many  kinds  and  many  sizes  of  parts, 
the  detail  in  which  costs  are  collected  and  recorded 
may  be  very  great.  The  detail  of  cost  accounting  will 
also  vary  greatly  with  the  purposes  for  which  it  is 
desired  to  use  the  collected  cost  data.  These  purposes 
may  be  several,  but  in  general  they  may  be  summed 
up  under  these  heads : 

(a)  To  show  the  actual  cost  of  operations  or  per- 
formances. 

(b)  To  serve  as  a  basis  for  predicting  future  per- 
formances. 

(c)  To  form  the  basis  of  managerial  and  other 
reports. 

The  first  purpose  constitutes,  of  course,  the  funda- 
mental reason  for  keeping  costs.  In  so  far  as  total 
profits  are  concerned,  there  is  no  necessity,  as  will  be 
shown,  for  a  cost-keeping  system.     But  it  is  essential 

229 


230  COST  FINDING 

in  most  industrial  enterprises  to  know,  as  closely  as 
possible,  the  cost  of  producing  each  individual  article, 
sometimes  even  of  each  part,  if  for  no  other  reason 
than  to  know  which  lines  are  paying  and  which  are 
not.  It  should  be  fully  realized  that  factory  costs  are 
not  always  serviceable  in  fixing  selling  prices.  In 
many  instances  the  selling  price  must  be  fixed  by  the 
prevailing  market  price,  and  this  may  have  little  rela- 
tion to  the  cost  of  manufacture.  Such  circumstances 
are  especially  likely  to  prevail  in  lines  of  work  where 
cost-finding  methods  are,  in  general,  crude  and  poorly 
understood.  Yet  this  is  all  the  greater  reason  why, 
in  such  cases,  costs  should  be  known  as  accurately  as 
possible.  A  knowledge  of  the  details  of  the  cost  of 
producing  any  article  is  a  good  start  toward  reducing 
the  cost.  A  knowledge  of  the  actual  facts  concerning 
the  cost  of  production  of  each  article,  as  far  as  it  is 
economical  to  obtain  them,  would  seem  to  be  a  com- 
mon-sense requirement  for  a  continuation  of  any 
enterprise.  There  is  no  doubt  that  it  is  a  lack  of  this 
fundamental  knowledge  which  carries  many  enter- 
prises "to  the  wall."  The  detail  methods  of  recording 
cost  data  will  be  discussed  in  this  chapter. 

2.  Cost  data  for  predicting  performance. — As  al- 
ready noted  in  Section  3,  Chapter  III,  a  cost-finding 
system  that  is  used  only  for  recording  costs  has  ful- 
filled only  a  part  of  its  true  purpose.  Too  many  man- 
agers think  of  costs  simply  as  records  of  performance, 
whose  usefulness  is  ended  once  the  goods  are  billed. 
Now  the  most  significant  movement  in  modern  manu- 


ASSEMBLING  AND  RECORDING  COSTS      231 

facturing  is  the  tendency  to  predict  all  manufacturing 
performances.  The  engineering  and  designing  de- 
partments long  ago  began  the  prediction  of  the  con- 
structive features  of  manufactured  products.  The 
form  and  dimensions  of  all  manner  of  articles  and 
even  of  the  tools  for  producing  them  are  predicted,  as 
well  as  the  practical  and  theoretical  performance  of 
the  completed  product.  Careful  managers  have  for 
many  years  endeavored  to  foretell  the  times  and  costs 
of  productive  operations  with  the  same  degree  of  cer- 
tainty that  has  been  attained  by  the  engineer  and  the 
designer.  One  of  the  cardinal  principles  of  so-called 
"scientific  management"  is  the  securing  of  advance 
knowledge  of  the  time  and  cost  of  each  operation  in 
detail,  without  leaving  anj'^thing  to  chance  or  judg- 
ment. And  just  as  collected  scientific  knowledge 
forms  the  background  of  engineering  production,  so 
collected  cost  data,  including  the  two  important  fac- 
tors of  time  and  wages,  form  the  basis  of  all  predic- 
tions of  productive  performance.  The  relation  of 
time  study  and  motion  study  to  cost  prediction  is  the 
same  as  the  relation  of  engineering  research  to  engi- 
neering design.  Any  system  of  recording  costs,  to  be 
most  effective,  must  be  arranged  with  this  feature  of 
management  in  view.  A  more  extended  discussion 
of  this  important  phase  of  cost  finding  is  given  in 
Chapter  XVII. 

3.  Value  of  ea^penditure  reports. — In  addition  to 
the  two  functions  of  cost  records  discussed  above,  re- 
ports should  also  show  the  distribution  of  expendi- 


232  COST  FINDING 

tures.  The  total  expenditures,  while  showing  the 
manager  the  probability  of  gain  or  loss,  do  not  tell 
him  much  regarding  the  ways  in  which  money  has 
been  spent,  or  indicate  to  him  where  he  must  insist 
upon  retrenchment  and  improvement.  He  cannot 
find  this  information  by  a  personal  inspection  of  the 
details  of  the  cost  records,  except  as  those  records 
apply  to  specific  parts.  If,  however,  the  cost  data 
are  carefully  classified  and  gathered  up  into  reports, 
a  very  clear  idea  of  the  most  important  tendencies  in 
the  business  can  be  secured  by  the  manager.  Classi- 
fication and  summarizing  of  cost  data  according  to  the 
character  of  the  expenditures  is  hence  an  important 
feature  of  cost  recording,  and  it  must  be  kept  in  mind 
in  the  organization  of  the  clerical  machinery  of  the 
department.  This  feature  of  management  will  be 
more  fully  discussed  in  Chapter  XVI. 

4s.  Sources  of  cost  data. — The  detail  necessary  in 
recording  costs  of  production  will  vary  with  the  rela- 
tive amount  of  consideration  given  to  the  three  gen- 
eral uses  of  cost  data  which  have  just  been  discussed, 
and  also  with  the  amount  of  detail  involved  in  the  job 
concerned  and  the  character  of  the  processes  used  in 
doing  the  work.  Obviously,  no  one  system  is  appli- 
cable to  all  cases,  but  there  are  a  few  general  princi- 
ples in  common  use  which  may  be  helpful.  Referring 
to  the  last  item,  the  character  of  the  processes  used, 
one  can  clearly  see  that  the  methods  used  in  summar- 
izing costs  for  a  continuous-process  factory,  or  for  one 
using  processes  in  such  a  manner  that  it  is  difficult 


ASSEMBLING  AND  RECORDING  COSTS      233 

to  tell  where  one  job  stops  and  another  begins,  will 
be  somewhat  different  from  the  production-order 
method,  by  which  each  job  is  kept  distinct  from  all 
others.  The  discussion  will,  for  the  present,  be  con- 
fined to  the  production-order  method;  the  process 
method  will  be  considered  later. 

It  will  be  remembered  that  in  the  production-order 
method  all  time  expended  is  recorded  originally  on 
some  form  of  work  card  (Figures  9,  10  and  11,  pages 
85,  87),  which  identifies  the  work  performed  with 
the  shop-order  number,  the  part  or  drawing  number, 
the  time  expended,  and  the  workman  who  does  the 
work.  All  material  used  will  be  reported  from  the 
storeroom  by  means  of  the  requisition  on  which  the 
material  has  been  issued.  Sundry  expenditures 
which  are  neither  labor  nor  material  but  which  are 
chargeable  against  specific  jobs,  will  appear  on  prop- 
erly approved  vouchers.  The  indirect  charges  will  be 
reported  just  as  direct  labor  and  material  are  re- 
ported, so  as  to  be  charged  against  the  proper  stand- 
ing-expense order  numbers^,  to  allow  of  their  total 
amount  for  any  given  period  being  ascertained. 

5.  Cost  ledgers. — Now  if  the  work  is  of  such  a 
character  that  each  shop  order  involves  only  a  few 
charges  for  material  and  labor,  it  is  obvious  that  such 
charges,  with  the  correct  expense  charge  belonging 
with  them,  could  be  carried  directly  to  the  general- 
ledger  account  of  the  order  concerned,  and  with  any 
other  charges  properly  relating  thereto  the  entire 
transaction  could  be  recorded  in  one  small  ledger  ac- 


234.  COST  FINDING 

count.  On  the  other  hand,  if  the  job  involves  many 
operations  and  its  construction  is  to  extend  over  a  con- 
siderable period  of  time,  such  procedure  would  make 
the  general  ledger  too  bulky  and  would  tend  to  ob- 
scure its  true  object  as  a  summary  of  the  business. 
For  this  reason  costs  of  a  complex  character  are 
usually  collected  by  some  form  of  cost  ledger,  the 
function  of  which  is  to  record  permanently  the  details 
of  items  entering  into  the  cost  of  production.  Sum- 
maries only  of  the  cost  ledger  without  details  are  car- 
ried to  the  corresponding  accounts  in  the  general 
ledger. 

Cost  ledgers,  like  all  other  subsidiary  ledgers,  such 
as  the  stores  ledgers  and  stock  ledgers,  are  most  con- 
veniently made  up  in  the  form  of  a  card  system.  The 
forms  of  ruling  for  such  cards  must,  of  course,  be 
suited  to  the  requirements  of  the  business.  If  the 
number  of  entries  for  each  job  is  not  too  great,  a  single 
card  may  suffice  to  carry  the  record  of  all  the  details 
of  its  production.  A  cost-finding  sheet  of  this  char- 
acter is  shown  in  Figure  16,  opposite.  It  will  be 
noted  that  provision  is  made  for  recording  the  cost  in 
considerable  detail  under  the  three  principal  factors, 
material,  labor  and  expense.  The  several  operations 
performed  upon  the  piece  are  noted,  with  the  work- 
man's number  and  his  rate.  The  total  cost  also  is 
usually  noted  upon  the  card  by  adding  the  general 
expense  to  the  total  factory  cost  as  recorded. 

It  may  be  more  instructive,  however,  to  describe  a 
typical  method  of  recording  costs  where  the  details 


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236  COST  FINDING 

are  beyond  the  capacity  of  a  single  card.  It  will  be 
understood  that  the  procedure  described  is  a  typical 
one  only,  and  simply  suggestive  of  the  general  meth- 
ods in  common  use.  The  discussion  will  be  confined 
for  the  present  to  the  problem  of  finding  total  costs, 
which  was  stated  as  the  first  of  the  uses  for  which  costs 
are  kept. 

6.  Labor  and  material  cards. — When  a  production 
order  is  placed  in  the  shop  an  account  is  opened  in  the 
cost  ledger  by  placing  in  its  files  the  necessary  cards 
properly  filled  out.  These  will  consist  generally  of  a 
labor-cost  card  and  a  material-summary  card.  The 
work  cards  (Figures  9,  10  and  11,  pages  85,  87) 
are  collected  daily  and,  after  being  approved  by  the 
proper  foreman,  are  forwarded  to  the  cost  depart- 
ment. Here  they  are  first  sorted  according  to  work- 
men's numbers,  that  is,  all  the  cards  sent  in  by  any 
one  workman  are  grouped  together.  It  will  be  noted 
that,  in  best  practice,  each  workman  will  send  in,  daily, 
a  separate  work  card  recording  the  time  he  has  worked 
on  each  and  every  job,  whether  he  has  finished  the  job 
or  not.  The  difficulty  of  separating  different  labor 
items  placed  upon  the  same  work  card  will  be  appar- 
ent. The  wages  represented  by  each  card  are  now 
computed  and  noted  thereon.  This  may  be  based 
upon  day-pay,  piecework  or  premium-plan  methods, 
but  in  every  case  the  wage  so  recorded  is  the  labor  cost 
chargeable  against  the  job,  so  far  as  that  particular 
work  card  is  concerned.  If  the  expense  is  distributed 
by  machine  rate,  or  if  different  percentage  rates  are 


ASSEMBLING  AND  RECORDING  COSTS      237 

used  for  different  departments  of  the  factory,  the  ex- 
pense belonging  to  each  work  card  should  also  be  com- 
puted at  this  time  and  noted  upon  the  card.  If  a 
fixed  percentage  is  used  for  all  work  alike,  it  is  gen- 
erally more  convenient  to  defer  the  computation  of  the 
burden  until  later. 

The  total  time  recorded  by  each  man  can  then  be 
checked  against  the  time-clock  or  the  checkboard  rec- 
ord to  insure  that  all  elapsed  time  recorded  by  these 
records  is  accounted  for.  The  daily  pay-roll  may  now 
be  made  out.  If  all  men  are  on  day  pay  an  independ- 
ent pay-roll  may  be  made  out,  based  upon  the  clock 
or  the  checkboard  record;  this  must  check  against 
the  costs  as  shown  by  the  work  cards.  If,  however, 
piece  rates  or  a  bonus  system  be  in  use,  the  pay-roll 
should  be  based  upon  the  work  cards,  tho,  even 
then,  the  elapsed  time  must  check  against  the  clock 
record. 

7.  Labor-cost  sheet. — The  work  cards  are  then 
sorted  by  production  orders,  that  is,  all  cards  bearing 
the  same  production-order  number  are  brought  to- 
gether. The  items  referring  to  each  production  order 
are  then  posted  on  a  labor-cost  sheet,  as  shown  in  Fig- 
ure 17  (page  238),  a  separate  sheet  being  made  out 
for  each  production  order  so  that  the  total  labor  cost 
of  the  order  concerned  can  be  summarized  at  any  time. 
In  cases  where  the  labor  charges  are  few,  they  could, 
of  course,  be  posted  directly  to  a  cost-summary  card, 
such  as  is  illustrated  in  Figure  16  (page  235).  The 
detail  in  which  the  labor  cost  may  be  recorded  on  the 


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ASSEMBLING   AND    RECORDING    COSTS     239 

labor-cost  card  must,  of  course,  vary  with  conditions. 
It  may  be  a  simple  running  memorandum,  a  sum- 
mary of  which  will  give  only  the  total  labor  cost  of  all 
operations,  or  it  may  be  arranged  so  as  to  give  the 
total  labor  cost  by  operations,  as  illustrated  in  Figure 
17  (page  238),  where  similar  operations  may  be  to- 
taled. Either  the  amount  of  each  work  card  may  be 
recorded,  or  the  cards  may  be  recorded  in  groups,  as 
conditions  dictate.  In  so  far  as  securing  total  labor 
costs  is  concerned,  the  work  cards  are  no  longer  neces- 
sary after  they  are  posted  on  the  labor  sheet.  Their 
further  use  in  securing  statistical  costs  will  be 
discussed  later. 

8.  Material-cost  sheet. — The  material  requisitions, 
after  being  properly  evaluated  either  by  the  store- 
keeper or  in  the  cost  department  may,  if  their  number 
is  small,  be  filed  with  the  labor-cost  sheet.  If,  how- 
ever, there  are  many  material  entries  they  may  be 
posted  on  a  material-cost  sheet  in  the  same  way 
that  labor  charges  are  carried  on  the  labor-cost  sheet. 
For  the  ascertainment  of  total  charges  the  material 
requisitions  have  then  fulfilled  their  service,  but  like 
the  work  cards  they  are  still  useful  for  statistical 
purposes. 

The  costs  of  indirect  labor  and  material  are  gath- 
ered in  the  same  manner  as  in  the  case  of  the  direct 
costs — the  detail  costs,  as  they  come  in  on  work  cards, 
and  the  material  requisitions  being  carried  to  the 
proper  expense  accounts.  The  total  of  these  expense 
accounts  must  be  compared  periodically  with  those  of 

xn— 17 


a40  COST  FINDING 

preceding  periods,  to  insure  that  the  factors  used  in 
their  distribution  are  accurate. 

9.  Cost-summary  sheet. — From  the  labor-cost  sheet 
and  the  material-cost  sheet  the  total  prime  cost  to  date 
may  be  summarized  at  any  time.  AVhen  the  job  in 
question  is  finished,  the  summaries  of  both  of  these 
sheets  are  carried  to  a  cost-summary  sheet.  If  only 
one  article  is  involved  and  all  labor  and  material  items 
are  carried  to  a  cost-ledger  card,  as  shown  in  Figure 
16  (page  235),  the  summary  may  be  made  directly 
upon  it.  To  the  prime  cost,  so  summarized,  is  added 
the  expense,  if  it  is  distributed  by  a  percentage 
method;  or  the  proper  proportion  of  the  supplemen- 
tary expense  is  added  if  the  machine-rate  method  of 
distribution  is  in  use.  If  there  are  any  sundry 
charges  that  are  chargeable  directly  to  the  production 
order,  as  shop  expense,  these  are  also  added;  in  this 
way  the  factory  cost  is  completed.  To  the  factory 
cost  is  added  the  proper  percentage  for  general  ex- 
pense and  selling  expense,  and  thus  the  total  cost  of 
the  article  is  obtained. 

10.  Grand  cost  summary. — If  any  particular  job 
consists  of  many  parts,  and  production  orders  have 
been  issued  for  each  part,  so  as  to  segregate  its  cost, 
a  grand  summary  of  all  cost-sunmiary  sheets  for  the 
entire  job  must  be  made,  as  shown  in  Figure  18,  oppo- 
site, which  illustrates  clearly  the  summarizing  of  the 
costs  for  a  direct-acting  steam  pump.  The  figures 
given  are  hypothetical  and  taken  somewhat  at  ran- 
dom.    The  need  of  such  methods  will  be  made  more 


241 


242  COST  FINDING 

apparent  by  a  consideration,  for  example,  of  the  costs 
of  a  large  multiple-cylinder  marine  engine,  where  it  is 
desired  to  obtain  the  individual  costs  of  the  several 
parts,  or  group  of  parts,  which  make  up  the  engine. 
Or,  again,  if  it  is  desired  to  obtain  not  only  such  indi- 
vidual costs  but  also  the  summarized  costs  of  the  pro- 
pelling machinery,  such  summaries  are  a  necessity. 
In  the  example  shown.  Figure  18,  the  factory  expense 
is  computed  separately,  as  would  be  necessary  if  dif- 
ferent percentages  were  used  in  different  depart- 
ments. The  general  and  selling  expense  is  also  com- 
puted and  added,  and  in  this  way  the  total  cost  is 
obtained. 

11.  Comparative  records. — It  will  be  evident  that 
the  above  methods  are  sufficient  for  the  purpose  of 
recording  total  costs.  If,  however,  it  is  desired  to  use 
these  recorded  costs  as  a  means  of  fixing  piece  rates, 
or  estimating  on  contracts,  it  is  very  often  desirable  to 
express  them  comparatively,  since  a  single  set  of  costs 
is  not  likely  to  be  reliable  as  a  guide  to  future  work. 
If  costs  are  recorded  by  production-order  numbers, 
as  explained  in  the  foregoing  discussion,  only  the 
totals  of  the  several  items  are  quickly  available. 

In  the  case  of  the  pump,  illustrated  in  Figure  18, 
the  summary  will  have  back  of  it  a  number  of  sub- 
sidiary summaries,  each  giving  the  total  for  one  of 
the  components  of  Figure  18.  If  these  subsidiary 
summaries  are  filed  under  the  controlling  production- 
order  number,  it  is  obvious  that  more  or  less  difficulty 
will  be  experienced  in  finding  the  comparative  cost  of 


ASSEMBLING   AND   RECORDING   COSTS     243 

a  given  piece  as  manufactured  for  different  pumps  of 
the  same  size  and  kind. 

12.  Costs  by  classes. — If,  on  the  other  hand,  the 
cost  of  detail  parts  is  recorded  by  classes  and  not  by 
production-order  numbers,  this  difficulty  is  obviated. 
This  method  is  illustrated  in  Figure  19  (page  244) 
where  the  details  of  the  manufacture  of  several  lots 
of  turret-lock  rings  for  turret-lathes  are  thus  recorded. 
The  record  given  in  Figure  19  is  very  complete,  the 
work  being  recorded  by  classes  and  also  by  produc- 
tion orders.  The  m,  a  and  h^  under  each  class  of 
operation,  indicate  whether  the  work  has  been  done 
by  a  mechanic,  apprentice  or  helper.  The  number  of 
minutes  expended  on  each  operation  for  the  lot  is 
recorded  and  directly  underneath  is  the  cost  per  piece. 
On  the  right  the  totals  of  these  items  are  summarized, 
together  with  the  total  cost  per  piece  in  each  lot. 
Records  of  this  kind  are  very  instructive  in  setting 
piece  rates  or  comparing  methods  of  production. 

13.  Detail  of  costs. — In  the  case  of  the  construction 
of  a  single  machine  or  of  a  small  number  of  machines, 
where  a  repetition  of  the  order  is  not  probable,  it  is 
sufficient  to  record  the  cost  by  production-order  num- 
ber, filing  the  detail  and  summarized  costs  which  are 
obtained,  under  a  few  order  numbers.  But  in  manu- 
facturing a  standard  product,  which  is  in  more  or  less 
continuous  production,  the  method  of  filing  by  classes 
is  much  more  useful.  Many  so-called  "border-line" 
cases  arise  in  which  judgment  must  be  relied  upon  in 
choosing  the  most  practical  method.  Obviously,  many 


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ASSEMBLING   AND    RECORDING    COSTS     245 

variations  may  be  made  in  these  methods,  and  it  should 
be  remembered  that  the  usefulness  of  the  final  cost 
record  depends  largely  upon  the  intelligence  with 
which  the  production  orders  are  issued.  In  one  case 
it  may  be  sufficient  to  group  all  costs  under  a  single 
order  number  and  summary;  in  another  it  may  be 
necessary  to  divide  the  job  under  a  number  of  pro- 
duction orders,  and  to  carry  the  summarized  cost  of 
each  group  to  a  grand  summary  under  the  main  order 
number;  or,  again,  it  may  be  necessary  to  record 
all  costs  by  classes  and  make  up  the  total  cost  of  a 
given  product  from  class  costs.  In  still  more  complex 
cases  the  main  parts  of  a  machine  may  be  made  on  a 
special  production  order,  while,  to  complete  it,  many 
auxiliary  parts  may  be  used  that  have  been  manufac- 
tured on  class-order  numbers.  In  the  last  method, 
the  drawing  list,  Figure  5  (page  55)  is  an  essential 
feature  of  the  production  process. 

14.  Indexing  cost  summaries. — It  is  clear  that  in  a 
busy  factory  turning  out  many  jobs  monthly  the  cost- 
summary  cards  will  increase  rapidly.  They  should 
therefore  be  filed  in  some  systematic  manner,  and  if 
necessary  should  be  indexed  in  some  way  so  as  to 
make  reference  to  them  quick  and  accurate.  In  many 
cases  an  alphabetical  index  by  customers'  names  may 
be  sufficient ;  but  in  most  cases  filing  and  indexing  by 
classes  is  necessary.  All  generator  costs  may  be  filed 
together,  all  induction-motor  costs  may  be  filed  to- 
gether, and  so  on.  Thus,  this  method  contemplates 
the  working  out  of  a  complete  system  of  filing  and 


246  COST  FINDING 

indexing  by  classes.  For  instance,  following  this 
scheme  of  classification  all  cylinder-head  costs  are 
filed  together,  all  connecting-rod  costs  are  filed  to- 
gether, and  so  on.  It  is  clear  that  a  good  index  makes 
the  cost  records  very  much  more  effective ;  in  fact,  in 
large  systems  it  is  indispensable. 

15.  Relation  between  general  accounts  and  cost  ac- 
counts.— From  the  foregoing  discussion  the  relation 
between  the  general  books  and  the  cost  accounts  will 
be  clear.  The  general  accounts,  as  a  rule,  concern 
the  operations  of  an  enterprise  as  a  whole.  The  en- 
tries in  these  books  cover  the  exchange  of  values  be- 
tween the  organization  and  other  organizations  or  in- 
dividuals. They  do  not  take  cognizance,  in  detail,  of 
inventories,  changes  in  plant  valuation,  or  manufac- 
turing expenses.  The  cost  accounts,  on  the  other 
hand,  are  concerned  with  the  movements  of  values,  in 
detail,  within  the  organization.  They  are  particu- 
larly concerned  with  inventories,  depreciation,  the 
distribution  of  manufacturing  expense,  and  similar 
items. 

Cost  accounts  should  be  regarded  as  detailed  state- 
ments, or  amplifications,  of  the  condensed  statements 
shown  in  the  general  accounts.  They  should  give  in 
detail  the  causes  which  produce  the  totals,  and  should 
enable  the  manager  to  reason  intelligently  regarding 
these  totals. 

It  should  be  carefully  noted  that,  so  far  as  finding 
the  total  profit  or  loss  of  any  enterprise  is  concerned, 
cost  accounts  are  not  generally  necessary.    Thus,  re- 


ASSEMBLING    AND    RECORDING    COSTS        247 

ferring  to  Figure  3  (page  26) ,  it  can  be  seen  that  all 
the  items  necessary  to  show  profit  or  loss  can  be  found 
from  the  general  accounts,  except  the  items  of  inven- 
tory. As  before  noted,  these  inventory  values  may  be 
found  by  visual  appraisal.  In  many  enterprises  this 
practice  still  prevails,  tho,  as  has  been  stated,  it  is  to 
be  recommended  only  as  a  check  on  the  more  ad- 
vanced inventory  methods  that  have  been  discussed. 
It  is  customary  in  most  enterprises  to  show  the  re- 
sults of  the  manufacturing  and  trading  parts  of  the 
business  by  what  are  called  "manufacturing"  and 
"trading"  accounts.  On  the  debit  side  of  the  manu- 
facturing account  is  placed  the  inventory  value  of  the 
material  in  stores  and  in  process  at  the  beginning  of 
the  period  under  consideration,  while  the  value  of  the 
same  items  at  the  end  of  the  period  is  placed  on  the 
credit  side.  The  difference  is  the  gain  or  loss  in  these 
values.  The  value  of  the  purchases  and  the  wages 
paid  during  this  period,  with  all  legitimate  manufac- 
turing expenses,  are  also  placed  on  the  debit  side. 
The  balance  of  the  account,  representing  cost  of 
manufacture,  is  charged  to  the  trading  account,  on 
the  credit  side  of  which  are  placed  the  receipts  from 
sales.  The  selling  and  administrative  expenses  are 
also  charged  to  the  trading  account.  The  difference 
between  the  two  sides  of  the  account  shows  whether  a 
gain  or  a  loss  has  resulted  during  the  period  under  dis- 
cussion.^ 

1  See  discussion  of  this  subject  in  the  Modern   Business   Text  on 
"Accounting   Principles." 


248  COST  FINDING 

To  ascertain  the  total  profits,  therefore,  it  is  not 
necessary  to  know  the  manufacturing  cost  of  individ- 
ual pieces  of  product;  only  the  total  cost  and  total 
sales  are  needed,  provided  an  inventory  is  compiled  at 
the  beginning  or  the  end  of  each  period  for  which  a 
financial  statement  is  made.  There  are  many  con- 
cerns in  this  country  that  still  operate  on  this  plan  of 
selling  at  market  prices,  regardless  of  manufacturing 
cost;  they  rely  on  a  periodic  inventory  to  find  out 
whether  a  loss  or  gain  has  occurred.  Such  an  inven- 
tory cannot  be  conveniently  made,  in  most  cases,  more 
frequently  than  semi-annually,  and  the  danger  of  such 
a  method  is  self-evident.  On  the  other  hand,  many 
accountants  and  auditors  have  little  faith  in  cost- 
accounting  methods;  they  prefer  to  deal  with  values 
which  are  definite,  as  is  the  case  with  direct  expendi- 
tures for  material  and  wages,  and  inventory  values 
based  on  visual  examination  of  the  assets.  They  pre- 
fer this  method  of  ascertaining  the  total  cost  of  the 
manufactured  product. 

16.  Cost  accounts  should  agree  with  general  ac- 
counts.— A  cost  system  may,  therefore,  be  operated 
with  little  relation  to  the  general  accounts.  •  It  might, 
indeed,  be  useful  to  the  shop  manager  as  a  guide  in 
operating  the  factory,  and  might  serve  also  to  fix  sell- 
ing prices,  without  being  closely  connected  with  the 
general  books.  It  should  not  be  forgotten,  however, 
that  if  the  cost  system  is  at  all  accurate,  the  sum  of  the 
detail  values  which  it  shows  will  agree  closely  with 


ASSEMBLING  AND  RECORDING  COSTS      249 

the  corresponding  totals  as  found  in  the  general  ac- 
counts. It  should  be  noted,  also,  that  the  general 
accounts  are  the  only  means  available  for  checking 
the  accuracy  of  the  cost  accounts.  For  this  reason  the 
cost  accounts  should  be  closely  connected  with,  and 
merged  into,  the  general  accounts.  In  very  simple 
cases,  the  general  books  may  include  all  the  detailed 
costs  that  are  collected. 

In  a  manufacturing  business,  for  instance,  the  fol- 
lowing accounts  might  appear  among  the  general 
accounts : 

Machinery  and  equipment 
Reserve  for  depreciation 
Patterns  and  drawings 
Small  tools 
Raw  materials 
Manufactured  parts 
Factory  supplies 
Manufacturing  expenses 
Goods  in  process 
Finished  products. 

Clearly,  these  accounts  must  be  fed  from  the  cost 
accounts,  and  it  is  possible  to  create  such  general  ac- 
counts as  will  serve  to  collect  the  totals  of  the  cost 
accounts.  If  the  cost  accounting  be  correct,  the  totals 
thus  obtained  will  check  closely  with  the  totals  that  are 
found  directly  from  the  pay-roll,  the  cost  of  purchases, 
and  other  accurate  sources  of  value.     Thus,  the  sum 


250  COST  FINDING 

of  the  wages  which  are  charged  in  the  cost  accounts 
against  productive  orders,  and  which  appear  in  de- 
tail in  the  several  job  accounts,  should  agree  with  the 
total  direct  pay-roll  as  reported  by  the  paymaster. 
The  total  manufacturing  expense  charged  in  detail 
thru*  the  cost  accounts  should  agree  closely  with  the 
totals  of  such  expenses  as  shown  by  the  purchases  and 
the  indirect  pay-roll.  The  material  charges,  however, 
cannot  be  made  to  check  so  exactly,  since  the  element 
of  waste,  and  similar  losses,  cannot  be  accurately  eval- 
uated; but  even  these  totals  should  not  differ  greatly. 
If  they  do  the  error  should  be  found.  In  general,  of 
course,  the  error  is  more  likely  to  be  found  in  the  cost 
accounts  than  in  the  general  accounts. 

The  degree  to  which  the  general  accounts  and  the 
cost  accounts  may  thus  interlock  will,  necessarily, 
vary  with  conditions  and  with  the  opinions  of  those 
concerned.  It  seems  that,  in  this  country  at  least,  the 
tendency  is  toward  a  closer  relationship  between  the 
two  sets  of  accounts.  This  is  logical,  since,  as  has 
been  explained,  the  cost  accounts  are  really  an  ampli- 
fication of  the  general  statements  and  should  be  accu- 
rate enough  to  check,  at  least  f  aii-ly  well,  with  the  more 
accurate  general  accounts. 

REVIEW 

How  would  you  rule  a  form  of  cost-summary  sheet?  A  labor- 
cost  sheet?     A  comparative-cost  sheet? 

Wliat  are  the  sources  of  cost  data  and  the  general  methods  of 
securing  them? 

Could  you  outline  in  the  form  of  instructions,  the  several  steps 
in  assembling  cost  data  ? 


ASSEMBLING  AND  RECORDING  COSTS      251 

How  would  you  index  cost  summaries  so  as  to  provide  for  quick 
and  accurate  reference? 

Do  you  clearly  understand  the  relation  that  the  different  forms 
mentioned  in  the  text  bear  to  one  another? 

Discuss  tl)e  relation  whicli  should  exist  between  the  cost  ac* 
coimts  and  the  general  accounts. 


CHAPTER  XVI 

ANALYSIS  AND  REDUCTION  OF  COSTS 

1.  Use  of  cost  data. — It  was  noted  in  Section  3  of 
Chapter  III  that  the  first  use  of  a  cost  system  was  to 
record  the  results  of  operations,  and  the  discussion  up 
to  this  point  has  had  to  do  with  this  phase  of  cost 
finding.  Figures  16,  17,  18  and  19  show  clearly  the 
summarized  costs  of  operations,  and  normally  such 
records  should  serve  as  a  basis  for  fixing  selling  prices. 
It  is  often  objected,  however,  that  the  selling  prices 
cannot  be  fixed  by  cost  data,  but  are  fixed  by  the  mar- 
ket, which  again  is  controlled  by  competition.  This  is 
undoubtedly  true,  and  it  is  true,  furthermore,  that 
market  prices  may  be  so  low  as  to  be  ruinous  to  all  but 
the  cleverest  manufacturer.  There  is  no  doubt  but 
that  many  failures  are  due  to  lack  of  accurate  knowl- 
edge of  costs  on  the  part  of  the  individual  and  on  the 
part  of  the  industry  as  a  whole.  And  herein  lies  one 
of  the  greatest  justifications  and  one  of  the  greatest 
uses  of  a  cost  system. 

If  the  market  price  does  not  permit  a  margin  of 
profit  over  the  recorded  costs  of  production  the  next 
logical  step  is  to  bring  the  costs  of  production  down  to 
a  point  where  such  profit  is  obtainable,  and  there  is  no 
effective  method  of  doing  this  without  the  aid  of  a 
well-conducted  cost-finding  system.     For  this  pur- 

252 


ANALYSIS  AND  REDUCTION  OF  COSTS     253 

pose  the  information  shown  on  Figures  16,  17,  18  and 
19  is  not  sufficient,  and  a  study  of  such  summarized 
records  does  not  throw  sufficient  hght  on  the  problem. 
More  detailed  information  must  be  at  hand. 

2.  Organizing  for  cost  reduction. — Nor  is  cost  re- 
duction a  problem  that  can  be  satisfactorily  under- 
taken by  any  individual.  The  cost  of  any  given  prod- 
uct is  the  work  of  many  hands  and  many  minds,  and 
problems  of  cost  reduction  are  best  approached  by 
calling  together  the  leaders  in  the  several  activities 
thru  which  cost  accumulates.  As  explained  in  Chap- 
ter V  in  the  volume  on  "Plant  Management'*  of  the 
Modern  Business  Text,  the  committee  system  is  a 
powerful  method  of  attacking  all  such  problems.  A 
committee  consisting  of  the  engineer  and  the  designer 
of  a  product,  the  tool  maker,  the  cost  clerk,  and  a  rep- 
resentative of  the  manufacturing  organization  can 
often  work  wonders  in  cost  reduction.  It  should  be 
remembered  that  manufacturing  is  a  difficult  matter, 
and  the  interchange  of  ideas  around  a  committee  table 
can  be  made  just  as  effective  in  this  work  as  it  is  in 
other  lines  of  human  activity.  Tlie  designer  can  often 
obtain  valuable  hints  from  the  shop  foreman  and  the 
toolmaker,  while  the  toolmaker  may  obtain  a  clearer 
idea  of  the  financial  problems  involved  from  a  discus- 
sion with  the  cost  clerk  and  the  factory  superintend- 
ent. 

3.  Relation  to  new  ideas  of  cost  control. — It  should 
be  noted,  furthermore,  that  the  methods  to  be  dis- 
cussed apply  to  any  form  of  management.     Chapters 


^54!  COST  FINDING 

VIII  and  IX  of  the  volume  on  "Plant  Management" 
deal  at  some  length  with  the  modern  methods  of 
predicting  labor  costs,  using  time  study  and  motion 
study  as  means  of  so  doing,  and  later  chapters  of  this 
book  deal  with  the  general  problems  of  cost  predeter- 
mination. These  modern  methods  in  no  way  super- 
sede the  general  methods  described  in  this  chapter,  but 
they  may  be  of  great  assistance  in  carrying  out  these 
general  methods  which  were  practiced  before  the  ad- 
vent of  scientific  management,  so  called.  There  are 
many  industries,  furthermore,  where  these  more  ad- 
vanced methods  of  labor  control  are  not  feasible  or 
necessary,  but  the  problem  of  cost  reduction  is  ever 
present  in  most  enterprises. 

4.  Cost  analysis. — It  has  been  shown  in  the  pre- 
ceding chapters  that  cost  is  made  up  of  material  cost, 
labor  cost,  and  expense.  Of  these  three,  material  cost 
and  labor  cost  can  be  identified  with  specific  pieces  of 
work,  but  expense  is  a  general  cost  that  cannot  be  allo- 
cated to  operations  as  it  is  incurred  but  must  be  dis- 
tributed on  some  other  basis.  Cost  analysis  for  the 
purpose  of  reducing  the  cost  of  any  particular  piece 
of  work  must  proceed  along  these  lines.  The  general 
reports  discussed  in  Chapter  XV  of  the  volume  on 
"Plant  Management"  of  the  Modern  Business  Text, 
while  useful  as  will  be  seen  in  reducing  expense,  are 
not  in  general  sufficiently  detailed  for  use  in  indi- 
vidual cases;  nor  are  the  cost  summaries  shown  in 
Figures  16,  17,  18  and  19  sufficient  in  general  for 
the  work  under  discussion. 


ANALYSIS  AND  REDUCTION  OF  COSTS      255 

5.  Special  cost  reports. — For  this  purpose  a  special 
cost  report,  such  as  is  referred  to  briefly  in  Chapter 
XV  of  the  volume  on  "Plant  Management",  is  most 
desirable.  Figure  20  shows  such  a  special  report 
taken  from  actual  practice  and  which  was  used  as  a 
basis  of  studying  the  labor  and  material  costs  of  cer- 
tain electrical  switches  with  a  view  to  reducing  the  cost 
of  production.  The  monetary  values  shown  are  in 
dollars  and  decimals  of  a  dollar,  and  it  will  be  noted 
that  these  values  often  had  to  be  carried  out  into  the 
fourth  or  fifth  decimal  place,  so  small  are  the  values 
involved ;  but  it  should  be  remembered  that  these  parts 
were  to  be  produced  in  large  quantities  and  such  re- 
finement was  not  only  justifiable  but  necessary. 
With  this  report,  with  the  actual  parts  of  the  switch 
itself  and  with  all  the  special  tools  concerned,  before 
them,  a  committee  consisting  of  the  switchboard  engi- 
neer, the  tool  maker,  the  chief  cost  clerk  and  the  manu- 
facturing superintendent  attacked  the  problem  of  cost 
reduction  with  marked  success.  This  investigation 
involved  the  consideration  of  the  design  of  the  switches 
as  to  manufacturing  possibilities,  a  careful  study  of 
all  tools  and  processes  on  hand  and  the  development 
of  new  tools  and  methods.  Careful  consideration  was 
given  to  the  question  of  waste  in  fabrication,  and  many 
trial  performances  were  made  with  a  view  of  finding 
the  piece  rates  that  should  be  set  for  operations. 

Such  special  reports  are  most  useful,  of  course,  in 
cases  such  as  the  one  just  cited,  where  production  in 
large  quantities  was  projected.     If  money  has  been 

XII— 18 


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Figure  20 
256 


ANALYSIS  AND  REDUCTION  OF  COSTS     257 

lost  in  the  construction  of  a  single  piece  of  work  where 
repeat  orders  are  not  expected,  reports  of  this  kind 
may  also  be  valuable  because,  if  you  know  the  sources 
of  loss  on  one  job,  you  can  estimate  costs  better  on 
others  of  a  similar  character  and  thus  prevent  similar 
losses  on  future  production.  Aside  from  the  value  of 
such  a  report  in  furnishing  a  basis  of  discussion  and 
in  showing  the  most  promising  opportunities  for  cost 
reduction,  in  its  revised  form  when  discussion  is  com- 
plete it  acts  as  a  standard  which  must  be  met  to  secure 
the  results  desired. 

6.  Reduction  of  material  cost. — Cost  reduction  by 
saving  material  involves  the  consideration  of  quan- 
tity, quality  and  waste.  If  the  designing  is  well  done 
there  is  comparatively  little  chance  of  reducing  the 
quantity  of  material  used.  This  is  particularly  true 
in  products  where  strength  and  rigidity  are  important 
factors;  in  such  things  as  shoes,  where  a  definite 
amount  of  material  must  be  used  for  a  given  model, 
or  in  such  products  as  the  electrical  switch  illustrated 
in  Figure  20,  where  both  quality  and  quantity  are 
fixed  by  engineering  considerations  and  underwriters' 
rules.  Nevertheless,  there  are  many  instances  where 
a  careful  consideration  of  the  material  involved  will 
result  in  considerable  saving  thru  reduction  in  the 
amount  of  material  or  the  substitution  of  other  mate- 
rials that  are  equally  serviceable  and  less  costly. 

The  subject  of  waste  is  often  an  important  factor, 
especially  where  many  parts  are  to  be  made  by  punch- 
ing or  otherwise  cutting  them  from  sheets  or  bars.     A 


258  COST  FINDING 

small  saving  per  piece  on  copper  stock  or  leather  goods 
may  amount  to  a  large  total,  and  the  methods  to  be 
pursued  in  such  cases  should  not  be  left,  in  general,  to 
the  worlanan.  If  the  waste  is  such  that  it  can  be  re- 
worked into  other  products,  the  job  in  question  should 
be  credited  with  the  value  of  the  saving.  Waste  which 
cannot  be  reworked,  but  which  can  be  sold  at  a  reduced 
price  as  scrap,  is  a  general  credit  offsetting  general 
expense.  This  is  an  important  item  in  some  indus- 
tries, and  the  general  consideration  of  savings  thru 
careful  segregation  and  collection  of  scrap  is  well 
worth  considering  in  any  industry. 

7.  Reduction  of  labor  costs. — The  reduction  of 
labor  costs  involves  a  consideration  of  design,  of  quan- 
tity to  be  manufactured,  of  processes  and  equipment, 
and  of  the  characteristics  of  the  individual  worker. 

It  is  not  enough  that  the  design  of  a  given  piece  of 
product  will  do  the  work  that  is  required  of  it  or  will 
be  satisfactory  for  the  purpose  for  which  it  is  intended. 
It  should  also  be  designed  so  that  it  can  be  produced 
in  an  economical  manner  and,  if  possible,  with  the 
equipment  at  hand.  A  good  designer  will  have  con- 
stantly in  mind  the  methods  that  will  be  necessary  to 
produce  the  part  he  is  designing,  and  low  costs  in  gen- 
eral must  begin  with  the  designer. 

A  careful  consideration  of  any  product  will  often 
reveal  changes  of  form  that  will  in  no  way  lower  the 
effectiveness  of  the  product  but  which  will  make  con- 
siderable difference  in  the  labor  cost.  In  fact,  no 
product  that  is  to  be  produced  in  large  quantities 


ANALYSIS  AND  REDUCTION  OF  COSTS     259 

should  be  approved  for  production  until  passed  upon 
by  the  manufacturing  superintendent,  or  some  one  in 
his  department  who  fully  understands  the  processes 
necessary  for  the  production  of  the  work  under  con- 
sideration. This  procedure  is  followed  in  many  enter- 
prises where  mass  production  on  a  large  scale  is  in 
operation. 

8.  Kelation  between  quantity  and  equipment. — It 
is  explained  in  Chapter  II  of  the  volume  on  "Plant 
Management"  that  the  unit  cost  of  production  can 
be  reduced  if  the  quantity  is  sufficient  to  warrant  the 
making  of  labor-saving  appliances.  An  increase  in 
the  quantity  that  is  to  be  made  will  often,  therefore, 
make  possible  the  construction  of  new  or  better  tools, 
with  a  consequent  reduction  in  unit  cost.  It  is  better 
economy  often  to  manufacture  a  large  quantity  at  one 
time  and  carry  the  surplus  in  stores  than  to  have  the 
product  coming  thru  the  shop  in  small  lots  as  needed. 
Many  shops  lose  much  money  thru  too  frequent  set- 
ting up  and  taking  down  of  manufacturing  equip- 
ment. This  point  is  more  fully  discussed  in  Chapter 
XVIII.  The  consideration  of  the  methods  and 
tools  to  be  employed  in  producing  a  given  part  is 
one  of  the  most  important  matters  connected  with  any 
productive  industry,  and  great  labor-saving  possibili- 
ties can  often  be  realized  by  a  committee  discussion  of 
this  point. 

It  should  be  remembered  in  making  investigations 
of  this  kind  that  special  tools  should  not,  usually,  be 
considered  as  assets  but  should  be  charged  to  the  cost 


260  COST  FINDING 

of  production  of  the  apparatus  for  wliich  they  have 
been  made.  The  gain  in  unit  cost  must,  therefore,  be 
weighed  against  the  first  cost  of  the  tools  and  the 
interest  on  the  same,  due  regard  being  had  to  the  maxi- 
mum quantity  that  can  be  })roduccd  before  the  tools 
are  worn  out,  and  the  probability  of  the  tools  becom- 
ing obsolete  before  that  time.  See  also  Section  6, 
Chapter  VII. 

9.  Current  ideas  of  expense. — It  will  be  clear  from 
the  preceding  chapters  that  expense  cannot  be  studied, 
like  labor  and  material,  with  reference  to  particular 
jobs.  Its  origin  and  its  method  of  operation  are 
much  more  obscure  and  its  usefulness  or  uselessness 
much  more  difficult  to  visualize.  In  approaching  the 
study  of  expense  reduction,  therefore,  it  may  be  well 
to  consider  briefly  certain  of  its  characteristics.  To 
most  executives  expense  is  something  essentially  bane- 
ful, something  to  be  gotten  rid  of  if  possible,  and  yet 
there  is  no  doubt  but  that  blind  cutting  of  expense  may 
be  a  harmful  proceeding.  In  a  similar  manner  most 
executives  will  resist  strenuously  any  attempt  to  add 
to  current  expense.  This  attitude  often  stands  in  the 
way  of  progressive  methods.  One  reason  for  this  atti- 
tude, probably,  is  the  manner  in  which  many  expense 
items  are  incurred.  Some  foreman  or  clerk  or  other 
executive  simply  "wants"  more  help  or  additional  sup- 
plies and  these  are  granted  largely  because  of  fear  of 
handicapping  production,  tho  the  executive  may  have 
serious  doubts  of  the  actual  need  of  increasing  the 
expense.     Intelligent  investigation  of  expense  with  a 


ANALYSIS  AND  REDUCTION  OF  COSTS     261 

view  to  determining  its  actual  bearing  on  production 
is  somewhat  rare. 

10.  True  nature  of  expense. — As  a  matter  of  fact, 
expense  is  an  inherent  characteristic  of  modern  indus- 
try and  springs  directly  from  the  use  of  division  of 
labor.  It  does  not  appear  to  any  marked  extent  in 
primitive  industry,  but  has  grown  to  great  importance 
in  connection  with  modern  tools  and  modern  special- 
ization. Without  it  no  intelligent  direction  of  effort 
could  exist  and  the  economic  gains  that  result  from 
employing  men  according  to  their  capabilities  would 
be  largely  lost.  It  is  a  tool  which,  in  the  hands  of  a 
skillful  executive,  may  be  wonderfully  effective,  and 
in  the  hands  of  one  less  skillful  it  may  work  financial 
disaster. 

Expense  is  not,  therefore,  of  itself  an  indication  of 
inefficiency  but,  to  the  contrary,  the  absence  of  ex- 
pense may  be  a  mark  of  poor  management  as  indicat- 
ing that  high-priced  men  may  be  doing  work  that  can 
be  done  by  lower-priced  helpers.  Or  it  may  be  that 
processes  are  being  performed  by  high-priced  men 
that  can  be  done  in  a  different  manner  which,  tho  in- 
volving an  increase  of  the  expense  items,  would  re- 
duce unit  costs,  thus  accomplishing  the  desired  result. 
Many  of  the  gains  claimed  for  advanced  methods  of 
management  depend  upon  this  very  principle  for  their 
effectiveness.  All  of  the  so-called  management  sys- 
tems that  rest  upon  the  work  of  F.  W.  Taylor  involve 
an  increase  of  expense  in  order  to  secure  lower  unit 
costs. 


262  COST  FINDING 

11.  The  practical  aspect  of  expense. — ^While  these 
theoretical  considerations  are  true  in  the  abstract,  the 
experienced  manager  knows  that  for  any  given  set  of 
manufacturing  conditions  expense  tends  to  increase 
without  any  decrease  in  unit  costs,  and  he  knows  that 
the  expense  accounts  if  not  watched  with  jealous  care 
would  soon  devour  his  profits.  It  is  this  knowledge 
that  makes  most  managers  suspicious  of  any  increase 
in  expense  even  to  the  extent,  sometimes,  as  has  been 
noted,  of  standing  in  the  way  of  what  would  be  a  de- 
cided gain  financially.  And  it  is  this  knowledge  that 
makes  the  manager  much  more  interested  in  expense 
reduction  than  in  any  plan  which  tends  to  add  to  this 
troublesome  element.  Having  in  mind,  however,  all 
of  the  considerations  that  have  just  been  discussed  it 
will  appear  that  intelligent  expense  reduction  will 
involve 

( 1 )  Analysis  of  the  sources  of  expense. 

(2)  Investigation  of  the  need  and  usefulness  of 
expense. 

(3)  The  setting  of  limits  to  prevent  undue  increase 
of  expense. 

12.  Analysis  of  the  sources  of  expense. — The 
sources  of  expense  have  been  quite  fully  explained  in 
Chapters  VII  and  VIII,  and  in  Section  7  of  Chapter 
VII  it  has  been  shown  how  all  expense  items  can  be 
collected  by  classes  for  the  purpose  of  allocating  them 
in  the  costs  and  for  the  purpose  of  comparing  the 
totals  of  any  period  with  those  of  other  periods. 
These  classified  accounts  themselves  afford  an  excel- 


ANALYSIS  AND  REDUCTION  OF  COSTS     263 

lent  opportunity  for  the  study  of  costs  from  month  to 
month  with  a  view  of  preventing  their  growth.  But 
for  a  systematic  study  of  any  one  of  these  expense 
factors  a  special  expense  report  giving  in  detail  the 
sources  of  the  expense  to  be  studied  is  of  greater  value. 
Such  an  expense  report  covering  the  repairs  in  a  fac- 
tory is  shown  in  Figure  21.  It  will  be  noted  that  it 
shows  the  repair  expense  both  by  classes  and  by  de- 
partments and  makes  possible  a  detailed  discussion 
with  those  interested  in  and  responsible  for  each  item. 

13.  Investigation  of  the  usefulness  of  expense. — 
Once  the  specific  sources  qf  expense  are  known  it  is 
usually  not  a  difficult  matter  to  decide  what  expenses 
are  beneficial  in  operation  and  what  can  be  dispensed 
with.  Here  again  a  committee  is  of  great  value  in 
deciding  these  matters  which  are  often  of  a  personal 
character.  It  should  be  remembered  that  a  commit- 
tee is  impersonal  and  the  chances  of  obtaining  a  wise 
decision  as  to  what  is  valuable  and  what  is  useless  in 
expense  is  much  greater  if  left  to  a  committee  than  if 
left  in  the  hands  of  some  individual,  unless  this  indi- 
vidual has  great  insight  into  manufacturing  problems 
and  great  executive  ability. 

It  should  be  remembered  also  that  while  it  may 
often  be  desirable  to  reduce  expense  there  may  be 
cases  where  such  a  reduction  would  be  poor  economy; 
in  fact,  a  committee  of  this  character  should  have  con- 
stantly in  mind  the  possibility  of  increasing  efficiency 
by  a  judicious  addition  to  expense  in  some  places  and 
the  reduction  of  expense  elsewhere.     Such  an  investi- 


EXPENSE  ANALYSIS 

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264 


ANALYSIS  AND  REDUCTION  OF  COSTS     265 

gation  of  expense  is  intelligent  as  compared  with  arbi- 
trary reduction  in  a  blind  way  which  may  or  may  not 
obtain  the  results  desired.  Expense  labor  and  mate- 
rial, supplies,  repairs  and  other  items  of  expense  can 
be  studied  in  this  manner;  and  when  it  is  considered 
that  the  expense  may  form  one  third  or  more  of  the 
cost  of  production,  the  need  of  an  inquiry  into  its  char- 
acter, as  intelligent  as  that  which  is  applied  to  produc- 
tive labor  as  a  matter  of  course,  should  be  self-evident. 
14.  Limiting  expense. — Out  of  a  carefully  con- 
ducted investigation  such  as  has  been  discussed  should 
come  standards  of  some  kind  which  will  serve  as  guides 
in  keeping  expense  within  definite  limits.  A  very 
effective  way  of  doing  this  is  to  set  limits  to  the  amount 
that  each  foreman  may  spend,  in  a  given  period  of 
time,  for  each  class  of  expense.  Weekly  or  monthly 
statements  should  be  issued  from  the  cost  department, 
in  order  that  the  attention  of  each  official  may  be  called 
periodically  to  the  important  question  of  how  his  bud- 
get stands.  Much  of  the  excess  and  variation  in  ex- 
pense outlay  is  due  to  wastefulness,  and  it  is  surpris- 
ing how  quickly  and  effectively  a  budget  system  of 
this  kind  will  remedy  some  of  these  wastes.  Care 
should  of  course  be  taken  that  the  budget  is  made  up 
on  correct  data  so  that  the  work  of  production  may 
not  suffer.  There  is  no  economy  in  reducing  the 
amount  of  oil  to  the  point  where  bearings  will  suffer, 
or  in  reducing  the  amount  of  waste  to  be  used  to  the 
point  where  machines  will  be  untidy.  In  general, 
however,  a  budget  system  will  reveal  an  excessive  use 


^6  cost  FINDING 

of  expense  material  and  labor,  and  will  decidedly  tend 
to  check  wastes  and  keep  constant  the  relation  between 
dii'ect  production  and  expense.  The  budget  system 
is  particularly  effective  in  controlling  the  cost  of  ex- 
pense supplies  such  as  oil,  waste,  etc. 

REVIEW 

How  should  a  manufacturer  proceed  to  make  an  analysis  of 
costs?  Are  "Special  Reports"  useful  only  in  large  quantity 
production  ? 

What  are  the  three  points  of  attack  for  an  analysis  of  cost 
with  a  view  to  reduction  ? 

Why  should  the  manufacturing  superintendent  pass  upon  all 
products  which  are  to  be  produced  in  large  quantities? 

How  may  the  reduction  of  "expense"  increase  the  unit  cost  of 
production? 


CHAPTER  XVII 

PREDETERMINATION  OF  COSTS— MATERIALS 
AND  LABOR 

1.  General. — The  functions  of  a  cost  system  as  a 
means  of  finding  and  recording  costs,  and  also  as  a 
basis  of  managerial  reports,  have  been  discussed  in  the 
preceding  sections.  It  remains  to  consider  the  third, 
and  in  some  respects  the  most  important,  use  of  a  cost 
system,  namely,  the  predetermination  and  control  of 
costs.  It  has  been  shown  (see  Section  5,  Chapter 
XVI)  how  the  cost  of  an  article  already  produced 
may,  perhaps,  be  reduced  after  studying  the  cost  rec- 
ords; and  it  will  be  clear  that,  in  general,  accurate 
costs  are  a  powerful  means  of  studying  cost  reduction. 
If  the  costs  show  a  certain  record  of  performance, 
there  would  seem  to  be  no  reason  why  this  perform- 
ance cannot  be  repeated.  Experience  shows,  how- 
ever, that  such  is  not  always  the  case;  in  fact,  it  is  a 
rare  thing  to  have  two  lots  of  product  come  out  at  the 
same  cost,  even  tho  produced  on  the  same  machines 
and  by  the  same  men,  unless  special  care  is  taken  to 
insure  this  result  (see  Figure  19,  page  244). 

Yet  the  ability  to  predict  performance  and  costs 
becomes  more  important  daily  as  competition  becomes 
more  keen  and  strenuous.  A  few  years  ago  it  was 
not  uncommon  practice  in  the  case  of  construction 

267 


268  COST  FINDING 

jobs,  to  trust  to  the  honor  and  ability  of  a  contractor, 
and  to  reward  him  by  paying  him  a  percentage  on 
costs.  This  form  of  contracting  still  survives  to  a 
limited  extent,  tho,  generally,  the  contractor  is  called 
upon  to  state  a  definite  maximum  price.  In  most 
cases,  however,  the  contractors,  builders  or  merchants 
who  are  supplying  goods  are  requu'cd  to  bid  on  the 
contract,  the  lowest  bidder  securing  the  work.  From 
the  grocer  who  sells  a  pound  of  sugar,  to  the  man  who 
bids  on  the  construction  of  a  canal  or  a  battleship,  a 
guarantee  of  maximum  price  is  usually  demanded  be- 
fore any  business  is  transacted ;  and  the  bargain  is  not 
infrequently  cemented  by  legal  agreements  and  bonds, 
or  other  financial  guarantees  of  faithful  performance. 
2.  Difficulties  in  predicting  performance. — When 
the  contractor  or  merchant  turns  his  eye  inward  on  his 
enterprise,  with  a  view  to  computing  the  price  at  which 
he  can  compete,  he  is,  in  general,  confronted  with  the 
difficulties  that  have  been  discussed  in  the  preceding 
chapters ;  and  he  must,  in  most  cases,  use  extreme  care 
in  answering  the  momentous  question:  What  is  the 
cost  of  production?  Material  values  he  can  usually 
compute  with  fair  accuracy,  but  the  case  of  labor  is 
different.  He  finds  that,  in  general,  the  price  of  labor 
per  diem  is  fairly  definitely  fixed ;  but  he  may  find  no 
relation  between  that  price  and  the  output  per  diem, 
and  the  vexing  problem  of  expense  is  ever  with  him. 
If  the  work  is  similar  to  some  he  has  already  done, 
good  cost  records  will  give  him  an  adequate  idea  of  his 
limitations,  provided  he  can  insure  a  repetition  of 


PREDETERMINATION  OF  COSTS  269 

the  performance.  If  the  work  is  new  in  character,  his 
costs  may  still  be  of  great  value,  tho  not  based  on  this 
new  class  of  work.  The  wide  variation  in  almost  any 
set  of  bids,  even  where  the  article  is  closely  specified, 
is  sufficient  evidence  of  the  difficulties  that  are  to  be 
met  in  predicting  costs  of  production.  For  these  rea- 
sons, and  for  others  which  have  been  discussed  in  the 
foregoing  chapters,  there  is  a  rapidly  growing  demand 
on  the  part  of  managers  for  more  accurate  methods 
of  cost  prediction  than  are  generally  available. 

3.  Estimating  costs  of  production. — Costs  of  pro- 
duction may  be  estimated  for  one  of  two  purposes — 
namely,  as  a  basis  for  bidding  on  work  in  the  open 
market,  or  for  fixing  the  price  of  production  in  the 
factory  in  advance  of  actual  work.  Estimating  for 
the  first  purpose  may  here  be  considered,  so  far  as 
cost  finding  bears  upon  this  problem. 

Estimating,  of  any  kind,  without  the  use  of  cost 
data  can  be  little  more  than  skillful  guessing;  un- 
fortunately, much  of  the  estimating  that  is  done  is  of 
this  character.  Where  large  margins  of  safety  can  be 
had  in  the  way  of  good  profits,  these  simple  methods 
may  suffice ;  but  wherever  competition  is  a  factor,  suc- 
cessful bidding  must  rest  on  cost  data  of  some  kind. 
In  many  callings  and  industries,  considerable  data  of 
this  kind  have  been  compiled,  and  maj^  be  found  in 
books  on  estimating.  It  should  be  noted,  however, 
that  such  data  must  be  considered  as  representing 
average  results  only;  a  keen  estimator  will  not  be  satis- 
fied with  the  accuracy  of  his  predictions  until  he  pos- 


270  COST  FINDING 

sesses  data  representing  the  best  practice  of  his  own 
enterprise.  In  general,  therefore,  each  enterprise 
must  collect  its  own  data  in  accordance  with  the  prin- 
ciples of  cost  finding  which  have  been  discussed  in  the 
preceding  chapters. 

These  remarks  hold  true  with  even  greater  force  in 
regard  to  the  predetermination  of  costs  for  the  pur- 
pose of  setting  labor  values  in  the  factory  in  advance 
of  production.  Without  accurate  cost  data,  it  will  be 
found  that  piece  prices,  or  in  fact  any  other  form  of 
prediction  of  labor  values,  are  little  better  than 
guesses.  Furthermore,  unless  these  cost  data  have 
been  obtained  under  standardized  conditions,  and  un- 
less they  represent  not  only  what  has  been  done,  but, 
approximately  at  least,  the  best  that  can  be  done,  the 
estimator  cannot  be  sure  that  he  has  obtained  accurate 
results. 

4.  Distinction  between  actual  costs  and  estimated 
costs. — A  careful  distinction  should  be  made,  there- 
fore, between  predicted  costs  based  on  actual  results, 
and  certain  other  kinds  of  estimated  costs.  Cost  esti- 
mates made  in  advance  may  be  successfully  realized  in 
actual  productive  performances;  but  it  should  be  re- 
membered that  actual  costs  must  always  be  based  on 
actual  performance,  and  before  estimated  costs  are 
used  in  any  way  they  should  be  carefully  compared 
with  actual  results.  Some  of  the  cost  systems  in  com- 
mon use,  based  on  estimates  only,  and  unchecked  by 
actual  records  of  results,  must  be  considered,  at  best, 
entirely  inadequate. 


PREDETERMINATION  OF  COSTS  271 

Thus,  it  is  often  customary  to  make  an  estimate  of 
cost  based  upon  estimated  values  of  material,  labor 
and  expense,  the  estimates,  for  the  most  part,  being 
based  upon  empirical  information  and  personal  judg- 
ment. If  the  productive  operations  involved  are  re- 
peated, this  estimate  is  checked  or  tested,  in  a  rough 
way,  and  such  corrections  as  may  appear  necessary 
are  made,  this  procedure  being  repeated  as  often  as 
may  seem  desirable.  Clearly,  such  rough  rule-of- 
thumb  methods  of  predicting  costs  cannot  be  consid- 
ered seriously  when  compared  with  methods  based  on 
any  of  the  cost  systems  that  have  been  discussed;  yet 
the  amount  of  estimating  made  in  this  manner  is  sur- 
prising. 

Similar  considerations  apply  to  methods  such  as  the 
list-percentage  plan,  so  called,  that  is  sometimes  used 
in  continuous-process  industries  with  products  such 
as  soap,  brick  and  cloth.  Under  this  method,  the 
costs  of  production  of  each  brand  or  line  of  products 
are  estimated  by  a  percentage  based  upon  the  list 
prices.  These  list  prices  may  not  be  the  actual  selling 
prices,  but  they  will  be  proportional  to  them.  The 
estimated  costs  are  then  checked  by  actual  experience, 
and  corrections  are  made  where  necessar}\  There 
may  be  instances  where  such  crude  methods  will  suf- 
fice, but  it  woiild  seem  that,  if  these  estimated  costs 
could  be  checked  with  accuracy  by  actual  performance, 
it  would  be  easier  and  more  logical  to  accumulate  ac- 
curate cost  data  on  which  more  rational  estimates 
could  be  made  in  the  first  place. 

XII— 19  • 


2n  COST  FINDING 

5.  Predetermination  of  material  costs. — The  pre- 
determination of  material  costs  usually  offers  little 
difficulty.  The  art  of  designing  all  manner  of  manu- 
factured product  in  advance  of  production,  and  of 
specifying  the  characteristics  of  material  needed  for 
the  work,  has  been  so  highly  developed  that  little  need 
be  left  to  chance,  so  far  as  direct  material  is  concerned. 
Material  can  be  weighed,  counted,  or  otherwise  meas- 
ured in  such  a  way  as  to  make  it  possible  to  issue  just 
what  is  needed  to  satisfy  the  requisitions  (see  Sections 
4  and  5,  Chapter  V)  ;  and  the  fixing  of  the  material 
values  in  advance  of  production,  so  far,  at  least,  as 
direct  material  is  concerned,  can  be  made  with  some 
assurance  of  realizing  the  expectation.  Losses  due  to 
waste  and  mistakes  are  unavoidable,  but,  as  has  been 
explained  (see  Section  13,  Chapter  V),  these  can  be 
minimized,  with  proper  care.  The  problem  of  pre- 
dicting expense  material  is,  of  course,  a  part  of  the 
problem  of  predicting  expense,  or  burden. 

Obviously,  also,  if  the  material  lists  made  for  a 
given  article  are  accurate,  they  need  not  be  changed, 
so  long  as  the  article  is  made  in  that  particular  form. 
Such  lists,  therefore,  become  standard  and  may  serve 
as  a  definite  basis  of  calculating  material  costs  in  ad- 
vance. 

6.  Control  of  labor  costs,  day  rate.— The  control  of 
labor  costs  is  an  entirely  different  matter,  especially 
where  the  workers  are  on  day  rate.  Even  in  the  case 
of  conscientious  workmen  there  is  a  wide  variation  in 
the  cost  of  production  of  similar  articles  at  different 


PREDETERMINATION  OF  COSTS  273 

periods.  This  is  often  due  as  much  to  varying  condi- 
tions of  production  as  to  any  remissness  on  the  part 
of  the  workers ;  but  even  with  the  best  of  workmen  the 
rate  of  production  will  vary  greatly  where  the  day 
rate  is  assured  and  where,  consequently,  there  is  no 
special  incentive  for  men  to  do  their  best.  This  is  very 
well  illustrated  in  Figure  19  (page  244) ,  which  shows 
a  record  of  actual  production  in  a  well-managed  shop. 
The  variation  in  the  productive  time  of  various  men 
and  at  different  times  is  here  clearly  shown;  and  the 
difference  in  total  cost  per  piece,  shown  in  the  last 
column,  is  not  unusual.  Evidently,  the  prediction  of 
costs,  under  such  circumstances,  must  be  based  on  an 
average  experience,  or  else  a  large  allowance  must 
be  made  for  possible  variation. 

7.  Control  of  labor  costs,  piece  rate. — These  con- 
siderations, no  doubt,  have  had  great  influence  in  ex- 
tending piece-rate  methods.  If  the  employer  can  per- 
suade the  workman  to  do  a  given  piece  of  work  at  a 
definite  labor  price,  the  labor  cost  becomes  definite 
and  stable,  and  will  remain  so  as  long  as  the  agree- 
ment holds  good.  The  defects  and  difficulties  of 
straight  piecework  methods  have  been  touched  upon 
in  Chapter  XII  of  the  volume  on  "Plant  Manage- 
ment." These  disadvantages  are  real,  and  it  is  ap- 
parent that  piecework  is  not  universally  applicable. 
There  are  many  lines  of  manufacture,  however,  where 
this  method  in  some  form  must  be  used,  for  best  re- 
sults. Thus,  in  product  consisting  of  many  small 
parts,  and  in  the  manufacture  of  which  the  compe- 


274  COST    FINDING 

tition  is  keen,  piece  rates  in  some  form  are  essential 
to  stable  costs  that  can  be  used  with  assurance  in  pre- 
dicting future  performances. 

It  would  appear,  at  first  sight,  that  there  is  little 
probability  of  such  a  variation  in  the  cost  per  piece 
as  appears  in  Figure  19,  which  is  based  on  day  rate. 
If,  however,  different  piece  rates  for  the  same  piece  of 
work  are  given  to  different  operators,  variations  as 
wide  as  these  may  appear.  They  often  occur  where 
high-priced  operators  are  put  to  work,  in  an  emer- 
gency, on  a  class  of  work  that  is  ordinarily  performed 
by  lower-priced  men,  for  the  higher-priced  men  insist 
upon  and  obtain  a  special  higher  rate. 

8.  Labor-cost  control  under  advanced  wage  sys- 
tems.— A  careful  consideration  of  the  more  advanced 
wage  systems  ( see  Volume  4  of  the  Modern  Business 
Text)  will  show  that  these  systems  recognize  the 
general  principles  just  discussed.  All  of  them,  ex- 
cept the  Taylor  differential  piece  rate,  recognize  the 
value  of  the  day  rate  as  a  basis  of  labor  reward,  but 
all  of  them  lay  stress,  also,  on  the  accomplishment  of 
a  definite  amount  of  work  before  extra  reward,  or 
bonus,  is  given.  This  definite  amount  is  also  the 
minimum  amount  of  output  which,  in  the  opinion  of 
the  employer,  the  workman  should  produce,  tho,  if 
he  produces  more,  he  is  rewarded  accordingly.  All 
of  these  advanced  methods  of  labor  reward,  therefore, 
aim  to  secure  a  definite  amount  of  product  for  a  defi- 
nite amount  of  pay,  and  hence  embody  an  essential 
principle  of  piecework. 


PREDETERMINATION  OF  COSTS  275 

If  the  workman  produces  just  the  minimum  amount 
of  work  required  of  him,  but  does  not  earn  a  bonus, 
the  cost  per  piece  is  the  lowest  that  the  employer  can 
obtain  under  these  systems  of  pay.  If  the  worker 
exceeds  this  minimum  and  earns  a  bonus,  the  cost  per 
piece  rises;  but  this  rise  in  price  is,  presumably,  more 
than  offset  by  the  decrease  in  burden  due  to  increased 
output.  Obviously,  however,  if  the  minimum  is  so  set 
that  the  worker  can  gi'catly  exceed  it  and  thus  earn 
large  bonuses,  the  labor  cost  may  vary  almost  as 
widely  as  under  day  pay.  This  criticism  is  sometimes 
made  of  the  Halsey  premium  plan,  since  under  it  the 
required  minimum  output  is  based  on  day-rate  rec- 
ords, which  may  or  may  not  show  what  a  fair  day's 
work  should  be. 

The  criticism  of  cost  records  based  on  daywork, 
piecework  and  the  Halsey  premium  plan,  made  by  ad- 
vocates of  more  advanced  methods  is,  that  while  these 
records  show  what  has  been  done,  they  fail  utterly  to 
show  tvhat  can  be  done.  In  their  efforts  to  establish  a 
more  stable  relation  between  labor  reward  and  labor 
cost,  these  advocates  have  introduced  methods  that 
promise  to  have  an  influence  on  costs  that  will  entitle 
them  to  special  consideration.  Only  brief  mention 
can  be  made  here  of  these  metliods,  and  only  such  dis- 
cussion of  them  will  be  given  as  pertams  to  costs  and 
cost  finding. 

9.  Time-study, — It  has  long  been  a  practice  among 
progressive  managers  to  try  to  control  labor  costs  by 
making  preliminary  studies  of  the  time  required  to 


276  COST  FINDING 

perform  operations.  Sometimes  this  is  done  by  hav- 
ing skilled  workmen,  who  are  in  the  confidence  of  the 
employer,  make  preliminary  trials  of  the  job;  in  some 
cases  this  work  has  been  done  openly,  either  in  the 
production  department  proper,  or  in  special  shop 
laboratories  equipped  for  the  purpose.  It  remained 
for  Mr.  F.  W.  Taylor  to  systematize  and  refine 
methods  of  observation,  with  a  view  to  the  general 
solution  of  the  problem  of  determining  how  long  a 
given  piece  of  work  should  take.* 

Under  these  more  refined  methods,  the  time  re- 
quired to  perform  each  detail  of  a  given  operation  is 
taken  with  a  stop-watch,  by  trained  observers,  and 
carefully  recorded.  Observations  are  made  of  many 
repetitions  of  each  detail  operation,  as  performed  by 
several  competent  operators,  and  the  recorded  "unit 
times"  are  used  as  a  basis  for  establishing  a  standard 
of  performance  from  which  other  similar  perform- 
ances may  be  predicted,  either  in  whole  or  in  part. 
Allowance  must  be  made,  of  course,  for  fatigue  and 
rest,  and  many  data  are  already  available  on  this  point.  I 

It  will  appear  at  once  that  there  are  limitations  to 
this  method,  particularl}'^  when  the  number  of  pieces 
to  be  produced  is  small,  but  it  is  obvious  that  as  a  mode 
of  approaching  labor-cost  control  it  is  a  great  advance 
over  old  empirical  methods.  Without  doubt,  time- 
study  is  destined  to  occupy  a  prominent  place  in  in- 

1  Those  who  wish  to  study  these  methods  in  detail  are  referred 
to  Mr.  Taylor's  monumental  paper,  "Shop  Management,"  in  the 
"Transactions  of  the  American  Society  of  Mechanical  Engineers," 
Vol.  24. 


PREDETERMINATION  OF  COSTS  277 

dustrial  management,  where  refined  costs  are  a  fac- 
tor. 

10.  Motion-study. — It  has  long  been  recognized 
that  the  amount  of  work  produced  by  a  workman 
is  greatly  affected  by  the  convenience  of  his  surround- 
ings and  tools.  Complex  assembling  operations  are 
usually  made  the  object  of  careful  study  so  that  every- 
thing may  be  conveniently  arranged  and,  furthermore, 
so  that  the  sequence  of  operations  may  be  the  most  ef- 
fective. For  the  most  part,  however,  these  attempts 
have  been  confined  to  the  best  examples  of  mass  pro- 
duction. The  work  of  Mr.  Frank  Gilbreth  has  called 
attention  to  the  fact  that  great  gains  in  production 
can  be  made  by  systematic  motion-study  in  all  lines  of 
work.  The  most  interesting  feature  of  this  idea  is 
that  it  frankly  questions  the  efficiency  of  the  methods 
practised  even  by  the  simpler  trades,  and  it  has  been 
conclusively  sho\vn  that  the  handicraft  practices  are 
often  far  from  efficient.  It  has  been  proved  that 
many  unnecessary  motions  can  be  eliminated  even  in 
cases  where  it  was  supposed  that  the  highest  efficiency 
had  already  been  reached;  the  result  is  a  gain  in  pro- 
duction and  a  lessening  of  the  fatigue. 

Motion-study,  therefore,  in  conjunction  with  time- 
study,  makes  it  possible  to  predict  with  reasonable  ac- 
curacy how  a  piece  of  work  should  be  done,  and  how 
long  it  should  normally  take  to  do  it.  The  limita- 
tions of  motion  study  are  important,  however,  and 
should  be  carefully  studied  before  these  methods  are 
apphed.     The  human  factor  involved  in  the  appli- 


278  COST  FINDING 

cation  of  these  methods  is  of  the  utmost  importance 
and  it  should  be  carefully  considered. 

11.  Industrial  data. — The  ability  to  predict  costs 
will  depend  not  only  upon  the  information  gathered 
by  time-study  and  motion-study  but  also  considerably 
upon  the  exact  knowledge  of  industrial  processes  that 
the  rate-setter  possesses.  Thus,  in  machine  work  it  . 
may  be  possible  to  predict  how  long  it  should  take 
to  set  a  piece  of  work  in  the  machine  and  get  the  work 
started.  The  time  it  may  take  to  do  the  given  ma- 
chine operation  will  depend,  however,  on  the  capacity 
of  the  machine  and  the  efficiency  of  the  cutting  tool. 
Data  of  this  kind  are  not  available  in  most  industries 
and  must,  in  general,  be  obtained  for  the  specific  work 
in  hand.  The  task  of  collecting  these  data  may  be 
difficult  even  in  what  may  appear  to  be  simple  opera- 
tions, as  shown  in  Mr.  F.  W.  Taylor's  experimental 
work  on  the  art  of  cutting  metals  where  twelve  vari- 
able factors  were  found.  It  should  be  carefully  noted 
that  the  skilled  workman  cannot  usually  give  an  ac- 
curate statement  of  the  most  efficient  means  of  ac- 
complishing his  task.  This  is  because  of  the  complex- 
ity of  even  simple  industrial  processes,  and  because 
most  workmen  do  their  work  as  they  were  taught  by 
older  men  to  do  it,  with  little  or  no  thought,  often,  as 
to  really  efficient  methods.  Some  progress  is  being 
made  in  collecting  industrial  data  in  many  lines  of 
work,  and  in  the  near  future,  no  doubt,  the  informa- 
tion gained  from  such  data  will  prove  of  the  greatest 
benefit  in  the  solution  of  difficult  industrial  problems. 


PREDETERMINATION  OF  COSTS  279 

12.  Standard  performances. — If,  then,  the  man- 
ager possesses  information  such  as  has  been  described 
in  the  three  preceding  sections,  he  will  be  able  to  pre- 
dict with  some  degree  of  certainty  the  best  way  of  do- 
ing work,  and  the  time  it  should  take  to  do  it.  Fig- 
ure 22  (page  280)  illustrates  an  instruction  card,  so 
called,  showing  a  case  where  this  has  been  done.  It 
will  be  noted  that  the  sequence  of  the  several  opera- 
tions is  prescribed;  the  number  of  the  proper  tool  is 
given,  where  necessary;  and  the  depth  of  the  cut,  the 
feed,  and  the  speed  at  which  the  tool  is  to  be  driven 
are  also  stated.  The  time  that  each  operation  should 
take  is  given,  and  also  the  total  time  for  the  lot,  in- 
cluding the  time  for  changing  the  machine  for  another 
job.  An  allowance  of  10  per  cent  is  made,  as  a  margin 
of  safety.  The  total  predicted  time  is  recorded  in 
such  a  way  that  it  can  be  compared  with  the  time 
actually  required,  which  is  also  noted  on  the  card. 

If  an  instruction  card,  illustrated  in  Figure  22,  is 
to  be  taken  as  a  standard  of  performance,  every  sur- 
rounding condition  must  be  carefully  standardized, 
or  else  it  will  be  impossible  to  realize  the  prediction  in 
actual  practice.  The  problems  of  standardizing  in- 
dustrial processes  lie  outside  the  limits  of  this  book; 
for  a  fuller  discussion  of  modern  planning  methods, 
the  reader  is  referred  to  the  Modern  Business  Text  on 
"Plant  ^lanagement." 

13.  Limitations  and  difficulties. — Evidently,  there 
will  be  limitations  to  the  refined  methods  of  cost  pre- 
diction just  discussed.     They  cannot,  for  instance,  be 


JIUREKA  MFG.  CO.                                                                                j^O^  J/q 
INSTRUCTION  CARD 

Order  No, 

Drawing  No. 

Part  No. 

No.  of 
Pieces 

Material 

Mo. 

Day 

year 

2,r(>? 

3¥-6 

2^ 

X.O 

WX 

^ 

/^ 

l^fZi 

Workman's  Name 

Machine 

Speed  Boss 

C^A/m\jButLr      itUjj^^>jJki^ 

Axh^  70 

fern-         I^^Lu^aJiM 

Instructions 

Tool 

Cut 

Feed 

Speed 

Piece          Lot 
Time         Tltn^ 

1 

{!^l\je^uiA.aJ:i.<ry^ 

fS 

OO 

2 

:ATCaJjiru2  *l/n<L     cUiMoi/J^  CJlmMK^ 

xo 

00 

3 

<^c:ui(/n4-           Ji^ruilL'     ^ 

F  3 

8- 

3o 

4 

Cio^jj^li^wieD^    ptcC    JcjLOji-      dJM^ 

L  6 

I^S 

.06 

(?J 

70 

00 

5 

CRo^l^^^Mka-  cuX  jbmuiJM.     oiuiL, 

Li, 

IXS 

.06 

(P3 

10 

30 

6 

Cl«,r^^    -t'^ 

L6 

^ 

7 

CAcuy&iUl^  ^!L.fj»aL  a/nd.     -^eiuiL- 

IS 

8 

JLfcC<7-^C<3<^    OUlC      J^<KfL^Ji-         dio^ 

LS 

.03 

.IS 

ao. 

12 

00 

9 

Sxccrrui^  OuXj    .ymjjljb     cUiO 

L6 

03 

.IS 

ail 

b 

OO 

10 

tLa^^voj/t.      -ttrot 

013 

11 

CJLarrK/isA^              QnrvxM^d^ 

0(3 

1 

00 

12 

SX^y^"  Qyia-C'lLi/i^     ajv\Aj 

13 

cJL<b'ri£t;i'       jui-ey'dl^^ 

XS 

14 

C&M/y\^  Irui-cJ^yi/yuL      ti^Y^cO 

15 

cM^-a/yLoJi^  Mutrd^     (y\AiiK 

s 

OO 

18 

ddbdi     10  <i0   &■    yfi^JUlSb  jM>v>'Ui^ 

6 

'^J 

17 

18 

19 

20 

Totals  for  one  piece                                                                 GS  ^89-6    OO 

Total  time  for  5.0 pieces    =               (>S. /dllO i  ^i 6  =^          /J^9-6 

Total  time  actually  taken                                                          /X  f  (> 

Wlien  maclune  cannot  be  run  as  specified  report  to 

Signature  of  speed  bosff                            UtZmZA    ^JUrmMA. 

ITiGintB  SS.    Is.'ssa.McaajA  Caiu> 


eeo 


PREDETERMINATION  OF  COSTS  281 

economically  applied  where  the  product  is  small  in 
volume  and  of  great  variety.  In  fact,  the  same  limi- 
tations that  have  already  been  noted  regarding  elabo- 
rate cost-finding  methods  apply  to  the  planning  of 
costs  in  advance  or  to  the  prearranging  of  any  other 
part  of  administration  where  system  is  needed.  There 
are  limitations  and  difficulties  also  in  operating  these 
methods  from  the  standpoint  of  the  human  element 
involved. 

How  far  it  may  be  economically  possible  to  intro- 
duce these  methods  that  have  been  so  widely  discussed 
in  connection  with  scientific  management,  as  this 
movement  has  been  called,  cannot  be  discussed  here. 
The  general  idea  of  predicting  labor  values  will,  how- 
ever, become  a  permanent  feature  of  industrial  man- 
agement, and  progressive  managers  should  give  this 
phase  of  cost  finding  careful  attention,  especially 
where  the  volume  of  production  is  large,  and  competi- 
tion keen. 

14.  Connection  with  advanced  wage  systems. — The 
reasons  for  some  features  of  the  advanced  wage  sys- 
tems that  have  been  mentioned  will  now  be  clear. 
These  new  methods  of  rewarding  labor  have  grown 
out  of  the  effort  to  set  a  definite  task  for  the  worker. 
Thus  the  Gantt  bonus  method,  which  may  be  taken  as 
typical,  sets  a  definite  task  which  must  be  accom- 
plished before  a  bonus,  or  extra  reward,  is  given. 
For  any  production  less  than  the  task,  only  day  rate 
is  given.  The  object  of  this  bonus  is  evident.  The 
task,  set  on  the  basis  of  time-study  and  the  standard- 


282  COST  FINDING 

ization  of  all  surrounding  conditions,  is  large,  and  the 
worker  can  generally  accomplish  it  only  by  carefully 
following  directions  and  detail  instructions.  The 
only  incentive  that  will  induce  him  to  make  this  added 
effort  is  added  compensation.  If  the  preliminary 
studies  are  accurate,  it  will  appear  that  the  task  can  be 
so  set  as  to  demand  the  workman's  utmost  effort,  and 
it  is  this  aspect  of  these  new  methods  that  has  re- 
ceived the  strongest  condemnation.  Aside,  however, 
from  the  possibility  and  advisability  of  installing  such 
wage  systems,  the  influence  of  these  methods  on  cost 
prediction  should  be  carefully  noted.  All  ways  and 
means  that  enable  the  manager  to  control  labor  costs, 
or  to  remove  in  any  way  the  uncertainty  that  usually 
surrounds  the  cost  of  production,  will  be  carefully 
studied  in  the  near  future. 

REVIEW 

What  distinction  do  you  make  between  estimated  costs  and 
actual  costs  ? 

What  are  predetermined  costs,  and  how  are  they  obtained? 

What  are  the  principal  difficulties  encountered  in  predicting 
performance  ? 

How  are  labor  costs  controlled  under  the  different  systems  of 
wage  payment? 

How  would  you  undertake  time-  and  motion-studies? 

What  are  the  essential  features  of  an  instruction  card? 


CHAPTER  XVIII 

PREDETERMINATION  OF  COSTS— EXPENSE 

1.  Preparation  costs. — All  work  is  divisible  into 
two  stages,  namely,  preparation  and  actual  operation. 
Thus  it  will  be  noted  that  in  Figure  22  (page  280), 
the  time  for  preparation,  and  the  time  for  changing 
the  machine  at  the  end  of  the  operation,  are  planned 
as  separate  items.  The  importance  of  the  time  re- 
quired to  get  ready  to  do  a  piece  of  work  is  often  over- 
looked, in  spite  of  the  fact  that  it  may  have  a  great  ef- 
fect upon  the  cost  per  piece;  no  one  thing  shows  more 
clearly  the  desirability  of  making  parts  in  quantities. 

Referring  to  Figure  23  (page  284) ,  suppose  that  it 
takes  four  hours  to  prepare  for  a  piece  of  work.  This 
constant  value,  no  matter  how  many  pieces  are  made, 
is  indicated  by  the  vertical  ordinates  of  the  line  ab. 
Suppose,  further,  that  it  takes  one  hour  to  do  the  op- 
eration on  each  piece,  after  preparation  has  been 
made.  Then  the  number  of  hours  consumed  in  actual 
operation  on  any  given  number  of  pieces  is  indicated 
by  the  vertical  ordinates  between  the  line  ab  and  the 
line  AC;  and  the  total  time  required  to  prepare  for, 
and  produce,  any  given  number  of  pieces  will  be  in- 
dicated by  the  ordinates  between  om  and  ac.  Thus, 
it  will  require  fifty-four  hours  to  prepare  for  and  pro- 

283 


^84 


COST  FINDING 


duce  fifty  pieces;  twenty-nine  hours  to  prepare  for 
and  produce  twenty-five  pieces,  and  so  on. 

The  unit  time,  or  time  per  piece,  is  found  by  div^id- 
ing  this  total  time,  or  the  swn  of  the  time  for  prepara- 


55 


60 


45 


40 


85 


o 
130 


20 


J5 


ID 


D 

/ 

0 

/ 

r 

/ 

r 

/ 

/ 

/ 

/ 

/ 

Y 

V 

/\ 

/ 

\ 

\. 

/ 

/ 

"-^ 

■ 

t 

/ 

r 

/ 

B 
M 

' 

10  15  20  25  30 

NUMBER  OF  PIECES 

Figure  23 


35 


40 


45 


50 


tion  and  the  time  of  operation,  by  the  number  pro- 
duced. For  one  piece,  then,  the  unit  time  is  1  +  4  -r- 
1  =  5  hours ;    for    two    pieces,    it    is  2  +  4  -r-  2  =  3 


PREDETERMINATION  OF  COSTS  285 

hours;  for  five  pieces,  it  is  4  -|-  5  ^-  5  =  1.8  hours; 
and  for  fifty  pieces,  it  is  4  +  50  -H  50  =  1.08  hours. 
The  curve  de  is  the  curve  of  unit  times,  its  vertical 
ordinates  being  one-tenth  the  value  of  those  used  for 
AC.  The  rapid  fall  on  the  first  part  of  this  curve 
should  be  carefully  noted.  The  greatest  fall  in  unit 
values  occurs  when  two  pieces  are  made  instead  of  one, 
a  constantly  decreasing  gain  per  piece  being  obtained 
as  the  number  increases,  till,  after  thirty  or  forty 
pieces,  the  preparation  time  becomes  almost  negligi- 
ble, so  far  as  the  unit  cost  is  concerned.  This  princi- 
ple, which  holds  good  whether  the  preparation  is  meas- 
ured in  time  or  dollars,  is,  in  fact,  the  basic  principle  of 
mass  production ;  and  the  larger  the  number  of  units 
to  be  made,  the  more  the  time  and  money  that  can  be 
economically  expended  on  preparation  and  planning 
of  all  kinds.  Data  bearing  on  preparation  are  there- 
fore very  important  in  cost  prediction. 

2.  Application  to  special  tools. — The  general  prin- 
ciple discussed  in  the  preceding  section  applies  also  to 
all  special  tools,  such  as  jigs,  fixtures,  etc.,  and,  in  fact, 
to  all  preparatory  work  such  as  making  drawings  and 
patterns,  that  may  be  chargeable  to  any  particular 
piece  of  work.  Suppose,  for  instance,  that  the  manu- 
facturing expense  is  equal  to  the  direct  labor,  and  that 
the  labor  cost  on  a  given  piece  of  work  is  two  dollars. 
Then  the  cost  of  production  (aside  from  the  material 
values)  will  be  four  dollars.  Suppose,  further,  that 
by  making  a  special  tool  worth  $60  the  labor  cost  can 
be  reduced  to  fifty  cents,  and  the  productive  cost,  not 


286  COST  FINDING 

including  cost  of  material,  is  consequently  reduced  to 

one  dollar.     Since  the  gain  in  productive  cost  is  three 

dollars  per  piece,  twenty  pieces  must  be  made  before 

the  tool  will  be  paid  for.     The  unit  cost  when  just 

.„  ,    60  +  20       . 
twenty  pieces  are  made,  will  be  — ^ =  ^4,  or  the 

same  as  when  no  special  tool  is  used.  If  more  than 
twenty  pieces  are  made,  the  unit  cost  will  be  decreased ; 
and  if  less  than  twenty  pieces  are  produced  the  unit 
cost  will  be  more  than  $4,  and  the  special  tool  will 
be  the  cause  of  a  loss.     Thus,  if  100  pieces  are  made, 

the  unit  cost  will  be =  $1.60:  while  if  only 

100  ^ 

Ml  ,     60  +  4 
four  pieces  are  made,  the  unit  cost  will  be = 

4 

$16. 

If  sixty  pieces  are  made,  the  cost  of  the  tool  equals 
the  cost  of  the  labor  and  the  expense.  Up  to  this 
number  of  pieces,  the  controlling  factor  in  the  unit 
cost  is  the  cost  of  the  tool;  but  beyond  this  number, 
the  controlling  factor  is  the  labor  cost,  and  the  cost 
of  the  tool  soon  becomes  a  small  part  of  the  unit  cost. 
Thus,  it  has  been  shown  that  when  100  pieces  are 
made,  only  60  cents  is  added  to  cover  the  cost  of  the 
tool.  Intelligent  cost  prediction,  where  the  use  of 
labor-saving  tools  is  involved,  must  take  account  of 
these  factors.  It  has  already  been  shown  that  in  the 
case  of  all  equipment  the  interest  on  the  investment 
paust  also  be  taken  into  account.  , 


PREDETERMINATION  OF  COSTS  287 

3.  Grajihic  cost  data. — The  values  shown  in  Figure 
23  (page  284) ,  have  been  assumed  at  random,  but  they 
are  probable  values.  The  usefulness  of  expressing 
standardized  cost  data  in  this  form  will  be  evident 
when  costs  are  to  be  predicted.  If  laid  off  on  sheets 
of  large  size  such  graphs  will  save  much  computation 
where  varj^ing  numbers  of  pieces  are  to  be  produced 
from  time  to  time;  they  will  also  serve  to  indicate 
quickly  the  minimum  number  of  pieces  that  can  be 
economically  produced. 

The  principle  involved  is  also  of  very  great  impor- 
tance to  the  small  manufacturer  who  is  making  parts 
which  require  considerable  preparation.  The  decided 
saving  in  unit  cost  that  follows  from  making  even  a 
small  number  of  parts  at  one  time,  where  preparation 
is  a  factor,  is  not,  in  general,  well  understood;  yet 
careful  planning  in  advance  would  often  make  such 
savings  possible. 

4.  Predicting  expense. — It  will  appear  from  the 
discussion  in  Chapter  VII  that  the  methods  of  cost 
control  and  cost  prediction,  as  applied  to  material  and 
labor  values,  as  previously  discussed,  are  not  appli- 
cable to  expense,  or  burden.  It  is  not  possible,  under 
any  known  system,  to  predetermine  with  accuracy 
each  item  of  expense  material  and  labor  that  will  be 
needed  for  a  given  piece  of  production,  since,  as  has 
been  explained,  many  of  these  items  are  not  directly 
connected  with  the  given  piece ;  in  fact  the  connection 
may  be  very  remote. 

The  totals  of  these  expenditures  can,  however,  be 

.     XII— 20 


288  COST  FINDING 

closely  controlled  by  properly  arranged  cost  reports 
as  has  been  explained  in  Chapter  XV  of  the  volume 
on  "Plant  Management"  of  the  Modern  Business 
Text.  The  discussion  in  Chapter  XVI  of  this  vol- 
ume has  shown  how  expense  may  be  studied  in  detail 
and  limitations  set  to  its  growth  by  means  of  a  budget 
system.  If  the  budget  system  can  be  enforced  it  will 
be  clear  that  the  probable  expense  both  by  totals  and 
by  departments  will  be  fairly  well  known.  It  should 
be  carefully  noted  that  a  cost  system  may  distribute 
burden  satisfactorily,  after  it  has  been  incurred,  by 
using  data  based  on  past  performances,  correcting  the 
rates  from  time  to  time  so  as  to  provide  for  variation, 
but  a  budget  system  which  is  to  control  expense  in 
advance  in  an  intelligent  manner  must  have  its  totals 
set  with  some  definite  relation  to  the  volume  of  busi- 
ness transacted.  Care  must  be  used  also  that  a  bal- 
anced budget  is  provided  so  that  all  departments  are 
equally  well  cared  for  in  matters  of  expense.  The 
productive  capacity  of  a  plant  is  often  measured  by 
the  efficiency  of  any  department  or  even  of  some  ma- 
chine. These  relations  are  often  difficult  to  establish 
and  maintain. 

Since  all  the  methods  of  distributing  expense  estab- 
lish a  relation  between  expense  and  some  feature 
of  material  or  labor,  a  close  approximation  of  the  ex- 
pense necessary  for  a  given  piece  of  production  can 
usually  be  made  when  this  basic  factor  is  known. 
This  relation  can  be  used  with  some  assurance  if 
expense  totals  are  controlled  in  such  a  way  as  has  been 


PREDETERMINATION  OF  COSTS  289 

indicated.  But  this  approximation  cannot  be  com- 
pared in  accuracy  with  those  methods  of  predetermin- 
ing labor  values  that  have  been  treated  up  to  this 
point. 

5.  Conclusions. — The  treatment  of  the  subject  up 
to  this  point  will  have  made  it  clear  that  no  one  method 
of  cost  finding  can  be  laid  down  that  will  answer  the 
requirements  of  every  situation.  Each  case  must  be 
studied  independently  and  a  system  selected  that  will 
be  applicable  to  the  problem  at  hand.  The  discussion 
in  the  previous  chapters  is  based,  for  the  most  part, 
on  the  problem  of  cost  finding  in  manufacturing 
plants,  for  the  reason  that  it  is  in  these  plants  that 
the  problem  is  most  complex  and  most  perplexing. 
The  general  principles  discussed  hold  true,  however, 
for  all  cost-finding  methods,  tho  the  exact  manner  of 
their  application  necessarily  differs  with  circum- 
stances. 

It  is  of  prime  importance,  therefore,  that  the  execu- 
tive, in  installing  a  cost-finding  sj'stem,  or  in  opera- 
ting one  already  installed,  should  have  a  clear  idea  gf 
just  what  results  are  desirable.  A  cost-finding  sys- 
tem should  be  planned  in  advance  as  much  as,  if  not 
more  than,  any  other  part  of  the  factory  system.  It 
should  obtain  just  the  results  wished,  and  it  should 
not  gather  a  lot  of  useless  data.  Such  a  system  can 
fail  because  of  too  much  detail,  as  easily  as  it  can  fail 
because  of  lack  of  results.  It  is  of  importance,  also, 
that  the  results  obtained  be  made  use  of,  for  cost  data 
which  are  not  used  represent  wasted  money.     It  re- 


«90  COST  FINDING 

quires  a  man  with  knowledge,  intelligence  and  judg- 
ment, well  informed  in  the  details  of  the  business,  to 
plan  and  operate  successfully  a  cost-finding  system, 
if  the  problem  is  at  all  complex. 

The  introduction  of  a  cost-finding  system  is  often 
difficult.  This  is  true  partly  because  the  human  ele- 
ment enters  largely  into  the  success  or  failure  of 
nearly  all  so-called  "systems."  Workmen  are  not 
generally  interested  in  cost-finding  methods,  foremen 
are  often  antagonistic,  and  even  the  superintendent 
may  be  at  least  apathetic.  It  often  takes  considerable 
time  and  persistence  to  put  a  cost-finding  system  into 
successful  operation ;  and  it  nearly  always  requires  the 
firm  support  of  the  managing  executive  to  maintain 
it.  When,  however,  the  executive  has  once  developed 
a  cost-finding  system  which  presents  to  him  the  com- 
plete costs  of  his  units  of  production;  which  shows 
him  in  intelligent  detail  where  the  money  has  gone, 
whether  for  direct  or  indirect  production ;  which  shows 
him  the  relative  values  of  different  methods;  and 
which  enables  him  to  check  inefficiency  in  machine, 
process  or  employe — when  the  executive  has  perfected 
such  a  system,  he  has  obtained  the  best  possible  safe- 
guard against  failure,  and  a  guide  to  future  operations 
which  must  be  used  to  be  appreciated.  The  need  of 
a  cost-finding  system  of  some  sort  is  so  basic  that  it  is 
marvelous  indeed  that  any  man  should  think  of  oper- 
ating a  factory  without  one;  and,  without  doubt, 
wherever  competition  is  a  factor,  a  cost-finding  sys- 


PREDETERMINATION  OF  COSTS  291 

tern  will  be  the  corner-stone  of  the  factory  of  the 

future. 

REVIEW 

What  are  preparation  costs? 

Of  what  advantage  is  the  grapliic  method  for  the  presentation 
of  cost  data  ? 

What  general  conclusions  are  the  result  of  your  study  of  this 
volume?     NVhy  do  many  cost  systems  fail? 

What  difficulties  are  usually  experienced  in  introducing  a  cost 
system?     How  would  you  plan  to  overcome  them? 


CHAPTER  XIX 

APPLICATION  OF  COST-FINDING  METHODS 

1.  Principles  of  cost  finding  universally  appli- 
cable.— The  discussion  in  the  preceding  chapters  has 
centered  largely  around  factory  operations  and  manu- 
facturing processes,  and  most  of  the  illustrations  that 
have  heen  used  have  been  taken  from  factory  work 
of  some  kind.  This  is  a  natural  proceeding  since 
cost-finding  has  grown  up  for  the  most  part  in  factory 
work,  and  it  is  here  that  the  most  complex  cost-finding 
problems  are  to  be  found.  As  has  been  noted  in 
Section  2  of  Chapter  III,  however,  the  principles 
that  have  been  developed  are  applicable  with  proper 
modification  to  a  wide  range  of  activities,  commercial 
as  well  as  industrial.  There  are  many  enterprises 
in  operation  today  that  are  still  depending  on  some 
system  of  general  bookkeeping  and  which  are  facing 
financial  disaster  because  this  method  tells  them  little 
or  nothing  about  individual  costs.  It  may  be  instruc- 
tive, therefore,  to  discuss  briefly  the  applicability  of 
the  principles  that  have  been  developed  to  various 
kinds  of  industry. 

2.  Classification  of  industry. — An  intelligent  selec- 
tion of  a  cost  system  requires  a  clear  understanding 

292 


APrLTCATION  OF  METHODS  293 

of  a  few  fundamental  conceptions  that  havp  been  dis- 
cussed in  the  preceding  chapters.  It  will  have  l)een 
made  clear  (see  Chapter  III)  that  there  are  two 
classes  of  industry  that  are  clear  cut  in  their  character- 
istics and  for  which  there  is  little  trouble  in  selecting 
the  salient  features  of  a  cost  system  that  will  be  satis- 
factory. 

The  first  of  these  is  the  type  of  industry  in  which 
each  article  or  lot  of  articles  is  distinct  from  other 
products  and  can  be  numbered  or  named  in  such  a 
distinctive  way  that  all  labor  and  material  expended 
upon  them  can  be  accurately  recorded  against  their 
distinguishing  number  or  name  by  means  of  time 
cards  and  bills  of  material.  Expense  can  be  allocated 
by  some  one  of  the  methods  that  have  been  described. 
A  boiler  works  making  boilers  to  order  is  a  good 
example  of  enterprises  of  this  kind. 

The  second  clearly  defined  type  of  industry  includes 
those  in  which  a  single  product  is  made,  the  material 
flowing  in  a  constant  stream  thru  the  machines  and 
processes.  All  that  is  necessary  in  order  to  find  costs 
in  such  cases  is  to  divide  the  total  number  of  units 
produced  into  the  total  cost  of  production  for  a 
given  time.  Cement  plants  and  simple  ore  reduction 
mills  are  good  examples  of  this  type  of  industry. 

The  majority  of  industries,  however,  fall  in  between 
these  two  extreme  types.  They  may  approximate 
one  or  the  other  of  these  types,  or  they  may  possess 
elements  of  both.  In  some  cases  the  mixture  of  in- 
termittent and  continuous  processes  is  so  intimate  as 


294i  COST  FINDING 

to  make  accurate  cost  finding  difficult  if  not  impossi- 
ble. 

3.  Foundry  costs. — There  are  many  industries 
where  the  methods  that  have  been  described  are  often 
held  to  be  inapplicable  because  of  supposed  peculiar- 
ities in  the  work.  Managers  will  claim  that  their 
work  and  problems  are  "different"  and  it  is  difficult 
to  interest  them  in  modern  methods.  In  most  cases 
this  claim  is  imaginary  and  comes,  often,  from  having 
inherited  certain  old  ideas  and  methods.  As  a  mat* 
ter  of  fact  most  of  them  can  use  the  methods  that 
have  been  described,  with  little  modification.  Foundry 
costs  are  a  good  example  of  this.  At  first  sight  the 
work  may  appear  to  differ  greatly  from  other  forms 
of  factory  work,  but  closer  inspection  will  show  that 
this  difference  is  not  very  great. 

4.  Foundry  stores  system. — There  is  nothing  in 
the  operation  of  a  foundry,  for  instance,  that  prevents 
the  operation  of  a  good  stores  system  which  is  the 
foundation  of  costs.  There  is  no  reason  why  all  ma- 
terial and  supplies  for  a  foundry  cannot  be  checked 
out  as  are  similar  items  for  a  machine  shop,  and  the 
idea  of  a  continuous  inventory  which  makes  possible 
an  accurate  monthly  statement  applies  here  as  else- 
where. 

It  will  be  argued  by  many  that  nails,  gaggers  and 
such  small  matters  cannot  be  handled  in  this  way. 
There  would  seem  to  be  no  reason  why  foundry  fore- 
men cannot  draw  such  supplies  on  requisition,  and 
such  procedure  makes  possible  departmental  expense 


APPLICATION  OF  METHODS  295 

charges  which,  in  turn,  may  be  used  as  a  check  upon 
wasteful  methods. 

5.  Elements  of  foundry  costs. — Foundry  work  di- 
vides itself  naturally  into  four  de^^artments,  namely, 
melting,  molding,  coremaking,  and  cleaning.  The 
elements  of  cost,  therefore,  are  the  cost  of  metal  at 
the  spout  of  the  cupola,  the  cost  of  molding,  the  cost 
of  cores,  if  any  are  used,  the  cost  of  cleaning,  and  the 
general  expense  or  burden  incident  to  the  operation 
of  these  departments  and  such  departments  as  the 
store  system  and  stock  room  if  castings  are  carried  in 
stock.  Each  department  will  have  its  own  peculiar 
expense  items  and  each  department  should  be  charged 
with  these  items  so  that  departmental  burden  can  be 
readily  computed  for  any  piece  of  work.  This  pro- 
cedure is  necessary,  also,  to  check  up  the  cost  of 
operating  each  department,  and  this  is  desirable  under 
almost  any  circumstances. 

6.  Cost  of  metal. — If  all  labor,  material  and  ex- 
pense incident  to  melting  the  metal  are  collected  into 
one  account  it  would  appear  to  be  easy  to  compute 
the  cost  of  the  melted  metal  by  weight.  And  this 
would  be  true  if  all  castings  were  good  and  sound. 
There  is  always  a  certain  amount  of  bad  castings, 
however,  and  this  amount  must  be  considered  in  the 
costs.  There  is  also  a  considerable  amount  of  metal 
poured  in  the  form  of  risers  and  runners  that  must 
be  returned  to  the  cupola  and  remelted.  The  cupola 
labor,  expense  and  fuel  used  in  melting  metal  from 
defective  castings  and  runners  is,  of  course,  lost  unless 


296  COST  FINDING 

recovered  from  sales  of  other  castings.  The  cost  of 
melting,  therefore,  should  be  distributed  on  the 
amount  of  good  castings  produced.  A  simple  way  of 
providing  for  this  difficulty  is  to  charge  off  all  melting 
room  charges  against  the  total  weight  of  good  cast- 
ings produced  and  debit  the  melting  room  with  the 
material  value  of  all  metal  returned  in  the  form  of 
bad  castings,  runners,  etc. 

In  some  foundries  the  actual  material  cost  of  the 
melted  metal  is  kept  separate  from  the  labor  and  ex- 
pense of  the  melting  department.  It  is  thus  possible 
to  fix  the  material  cost  per  pound  for  all  castings, 
good  or  bad. 

7.  Distribution  of  departmental  expense. — The  ex- 
pense of  the  core-making  department  can  usually 
be  distributed  as  a  percentage  on  productive  labor 
without  great  error.  The  method  of  distributing  the 
expense  of  the  molding  departments  will  depend  upon 
the  class  of  work  performed.  If  the  work  is  of  the 
same  general  character  and  fairly  uniform  in  size, 
the  much-used  practice  of  distributing  all  molding 
costs  on  the  basis  of  the  weight  of  the  castings  has  some 
justification  and  provides  a  simple  method.  Where 
the  product  is  diverse  in  size  and  character,  however, 
distribution  of  expense  to  production  orders  as  a 
percentage  on  direct  labor  will  give  more  accurate 
results. 

If  the  work  of  the  foundry  varies  greatly  in  size 
and  character  all  the  arguments  in  favor  of  depart- 
mentization  set  forth  in  Section  3  of  Chapter  XIV 


APPLICATION  OF  METHODS  297 

apply  fully.  And  in  very  large  work  there  would 
seem  to  be  no  reason  why  the  method  of  production 
centers  cannot  be  used  with  success.  The  discussion 
in  Section  2  of  Chapter  VIII  concerning  defective 
material  and  sjioiled  work  applies  fully  to  the  disposi- 
tion of  the  labor  and  expense  involved  in  bad  work 
and  defective  castings.  The  material  values  of  de- 
fective castings  have  been  discussed. 

Similar  remarks  apply  to  the  cleaning  department. 
If  the  work  is  all  small  and  similar  in  character  the 
expense  of  cleaning  can  be  charged  off  on  the  basis 
of  weight,  but  where  the  product  is  diverse  in  size 
and  where  a  single  casting  may  require  several  hours 
to  chip  and  clean,  it  is  much  more  accurate  to  make 
direct  /  charges  against  each  production  order,  dis- 
tributing the  expense  of  the  department,  including 
the  cost  of  supervision,  as  a  percentage  on  the  labor 
employed. 

8.  General  foundry  expense. — If  all  expense  items 
can  be  equitably  divided  among  the  departments  the 
total  expense  would  be  discharged  thru  the  depart- 
mental expense  charges.  It  is  not  always  desirable 
to  do  this,  however,  and  usually  there  will  be  certain 
general  expense  charges  such  as  the  cost  of  unloading, 
handling,  and  transporting  material,  certain  clerical 
labor  and  other  items  incident  to  the  general  conduct 
of  the  business  which  rise  and  fall  in  amount  more 
nearly  in  proportion  to  the  weight  of  product  than 
to  the  direct  labor  employed.  If  such  expenses  exist, 
therefore,  they  can  be  discharged  as  a  percentage  on 


298  COST  FINDING 

weight.  These  general  expenses  are  to  be  distin- 
guished from  commercial  and  selling  expenses  which 
are  distributable  on  the  basis  of  shop  cost.  See  Sec- 
tion 1,  Chapter  XIV. 

Summary. — It  would  appear  from  the  foregoing 
that  there  is  nothing  inherent  in  foundry  work  that 
in  any  way  renders  inapplicable  the  general  principles 
of  cost  finding  that  have  been  discussed  in  the  preced- 
ing chapters.  Foundries,  like  all  industrial  and  com- 
mercial activities,  vary  in  size  and  in  character  of 
product,  but  not  nearly  so  much  as  do  machine  build- 
ing establishments;  and  foundry  cost  finding,  on  the 
whole,  is  simpler  than  in  these  latter  enterprises. 

9.  Intermittent  process  industries. — An  important 
group  of  industries  in  which  cost  finding  methods 
have  not  as  yet  been  very  fully  developed  inchides 
those  in  which  the  product  is  made  in  large  lots  that 
vary  somewhat  in  character  and  quality  but  yet  make 
use  of  the  same  or  similar  processes.  Enterprises 
making  food  i)reparations,  candy  factories,  textile 
industries  and  lumber  mills  are  good  examples  of  this 
type  of  enterprise.  Here  again  the  claim  is  fre- 
quently made  that  the  peculiarities  of  these  industries 
make  the  methods  that  have  been  advocated  in  the  pre- 
ceding chapters  inapplicable,  and  many  manufacturers 
in  these  industries  prefer  to  retain  their  old  book- 
keeping methods  which  they  have  inherited  from  the 
early  days  of  the  industry.  It  should  be  carefully 
noted  in  this  respect  that,  while  these  ordinary  book- 
keeping methods  will  show  the  owner  the  totals  of  his 


APPLICATION  OF  METHODS  299 

business  and  will  indicate  whether  he  is  or  is  not  mak- 
ing money,  they  will  not  show  him  what  lines  of  prod- 
uct are  paying  and  what  are  not. 

In  reality  these  enterprises  differ  in  no  way  from 
any  other  form  of  enterprise  where  the  costs  of  indi- 
vidual items  are  not  required  and  where  the  material 
passes  thru  several  processes  in  lots  or  "batches", 
absorbing  in  each  process  both  labor  and  material. 
Plating,  dipping  and  baking  processes  in  machine- 
building  industries  are  of  the  same  general  character, 
and  the  discussion  in  Section  5  of  Chapter  XIII  bear- 
ing on  these  processes  furnishes  the  solution  to  cost 
finding  in  industries  that  are  made  up  almost  entirely 
of  analogous  methods.  The  construction  of  an  ade- 
quate cost-finding  system  for  enterprises  of  this  kind 
will  be  greatly  simplified  by  keeping  certain  funda- 
mental principles  clearly  in  mind.  First  it  should  be 
remembered  that  all  productive  costs  are  made  up  of 
material,  labor  and  expense.  It  follows,  therefore, 
that  a  cost  system  should  allocate  accurately  the  ma- 
terial and  labor  which  go  into  each  lot  of  product. 
Secondly  it  should  be  borne  in  mind  that  careful  de- 
partmentization  by  processes  is  always  a  great  aid  to 
the  intelligent  allocation  of  expense  in  such  cases. 

10.  Cost  of  candy  manufacture. — In  candy  mak- 
ing, for  instance,  there  is  no  reason  why  all  material 
cannot  be  drawn  on  requisition  and  an  accurate  ac- 
count kept  of  all  material  components  of  the  product, 
particularly  as  candy  is  made  in  fairly  exact  propor- 
tions.   The  practice  of  allowing  foremen  to  draw 


300  COST  FINDING 

what  they  wish  and  simply  requiring  them  to  report 
what  they  have  drawn  and  what  they  have  produced, 
puts  no  check  on  wasteful  practices  and  is  contrary 
to  the  fundamentals  of  cost  finding.  (See  Chapter 
V.)  A  good  stores  system  is  not  only  possible  in 
such  work,  but  absolutely  essential  to  economical 
management  and  good  costs. 

Such  factories  should  be  carefully  divided  into  de- 
partments by  processes  as  for  instance  purchasing, 
stores,  cocoa  grinding,  fondant,  coating,  hard  candy, 
packing  and  selling,  etc.  Each  of  these  should  be 
charged  with  its  own  direct  and  indirect  labor  and 
other  expenses.  If  the  factory  is  small,  all  the  fac- 
tory expense  can  be  so  allocated  and  charged  off  by 
departments.  If,  however,  the  factory  is  very  large 
and  there  is  much  supervision  and  handling  it  may  be 
wise  to  collect  certain  general  expenses  and  discharge 
them  as  has  been  suggested  in  connection  with  gen- 
eral foundry  expense  in  Section  8  of  this  chapter. 
Departmental  expenses  may  be  discharged  in  two 
ways.  If  the  expenses  consist  largely  of  indirect 
labor  and  fixed  charges  they  may  be  discharged  as  a 
percentage  on  direct  labor.  In  such  work  as  dip- 
ping it  may  be  necessary  to  consider  the  coating  as  an 
expense  material  and  charge  it  off  against  the  weight 
of  the  product  coated  (see  also  Section  8  of  Chapter 
XIII ) .  The  factory  cost  would,  therefore,  be  made 
up  of  the  material  cost,  the  direct  labor,  the  depart- 
mental expenses,  the  general  factory  expense,  if  such 
is  necessary,  and  the  cost  of  packing.     The  cost  of 


APPLICATION  OF  METHODS  301 

managing  the  business  and  selling  expense  can  be  dis- 
tributed on  the  basis  of  factory  cost  as  explained  in 
Chapter  XIV. 

11.  Fluctuations  in  base  prices. — In  industries  such 
as  candy  making,  tlie  market  price  of  the  materials 
fluctuates  from  week  to  week  or  even  from  day  to  day, 
and  this  must  be  taken  account  of  in  fixing  selling 
prices.  These  fluctuations  may  be  so  great  and  so 
frequent  that  the  method  of  averaging  explained  in 
Section  9  of  Chapter  V  may  not  suffice.  If  it  is  de- 
sired to  keep  the  sales  price  in  harmony  with  the  mar- 
ket prices,  the  cost  of  a  given  amount  of  each  product 
can  be  worked  out  on  the  basis  of  certain  base  charges 
for  material.  Since  the  proportions  of  the  ingredi- 
ents in  each  kind  of  candy  are  known,  the  sales  price 
can  be  easily  corrected  to  approximate  the  changes 
in  the  market  prices  of  supplies. 

12.  Other  industries. — Many  other  illustrations 
could  be  cited  to  show  the  general  application  of  cost- 
flnding  methods  tho  superficially  these  methods  may 
appear  to  be  quite  diff^erent.  The  particular  methods 
that  may  apply  to  a  tannery  will  not  apply  to  a  shoe 
factory,  nor  will  the  blanks  and  forms  that  apply  to 
a  textile  mill  be  applicable  to  a  paper  mill.  Each 
industry  offers  its  own  special  cost-finding  problems 
depending  on  the  character  of  the  processes  involved, 
but  the  basic  principles  are  comparatively  few  as  has 
been  already  demonstrated.  The  problem  of  the  cost 
accountant  is  to  apply  these  basic  principles  in  an 
intelligent  manner  so  as  to  secure  the  required  results 


302  COST    FINDING 

with  a  minimum  expenditure  of  time  and  money.  It 
should  be  noted  furthermore  that  cost-finding 
methods  may  vary  widely  in  the  same  industry.  In 
one  machine  shop  it  may  be  desirable  to  secure  the 
cost  of  each  individual  machine  while  in  another  the 
cost  of  groups  of  machines  may  suffice.  Here  again, 
however,  the  basic  methods  of  cost  finding  will  be  the 
same  tho  varying  in  their  application. 

13.  Commercial  costs. — Another  important  field 
where  cost-finding  methods  are  slowly  finding  recog- 
nition is  in  the  field  of  retail  merchandising.  In  this 
field  such  accounts  as  are  kept  usually  do  not  go 
beyond  ordinary  bookkeeping.  The  Federal  Trade 
Commission,  appreciating  this  weakness  in  our  mer- 
cantile system,  ha«  issued  a  pamphlet  setting  forth 
a  simple  accounting  system  for  retail  merchants. 
In  the  preliminary  statement  of  this  pamphlet  stress 
is  laid  upon  two  points — namely,  the  absolute  neces- 
sity of  the  merchant  knowing  his  expenses  and  the 
need  of  making  as  frequent  a  turnover  of  his  money 
as  possible. 

Bookkeeping  and  accounting  methods  have  been 
well  developed  for  commercial  enterprises,  and  it 
would  seem  at  first  sight  as  tho  cost-finding  methods 
would  be  of  little  benefit.  It  should  be  remembered 
again  that  the  usual  accounting  systems  show  only 
what  total  gains  or  losses  have  been  made,  and  if  it 
is  desired  to  know  what  lines  pay  and  what  do  not 
pay  cost-finding  methods  must  be  resorted  to  here 


APPLICATION  OF  METHODS  303 

as  elsewhere.  In  a  small  retail  store,  for  instance, 
where  many  articles  are  sold,  it  is  not  possible,  in  gen- 
eral, to  tell  with  accuracy  just  what  lines  pay  best, 
sirice  expense  distribution  must  be  by  some  averaging 
method.  Even  here  care  should  be  used  in  setting 
prices  so  as  to  cover  the  expense  and  provide  a  profit, 
and  the  reader  should  reread  Sections  9  and  10  of 
Chapter  III  which  deal  with  an  important  phase  of 
this  matter. 

14.  Departmentization  of  retail  stores. — Even  in 
small  retail  stores  an  effort  should  be  made  to  segre- 
gate expense  by  activities  if  for  no  other  reason  than 
to  check  up  variations  in  these  factors.  Figure  24, 
which  is  taken  from  the  Government  publication  al- 
ready referred  to,  shows  a  monthly  statement  of  a  re- 
tail business  so  arranged  as  to  show  all  important 
items  of  expense  by  classes.  The  buying  expense, 
the  selling  expense  and  the  expense  of  delivery  are 
shown  separated  from  the  general  expenses  of  the 
business. 

When  a  store  grows  large  enough  to  have  indepen- 
dent departments  such  as  hats,  shoes,  gloves,  etc., 
many  of  the  cost-finding  methods  that  have  been  dis- 
cussed become  pertinent.  Each  department  should 
then  be  charged  with  its  own  labor  and  expense  and 
such  a  share  of  the  general  expense  as  properly  be- 
longs to  it.  In  fact  the  general  theory  of  production 
centers  applies  here  quite  closely,  and  managers  of 
department  stores  may  gain  much  help  by  a  careful 

XII— 21 


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304 


APPLICATION  OF  METHODS  305 

study  of  these  methods  that  have  been  so  effective 
in  other  hnes  of  work,  for  the  averaging  methods  that 
are  commonly  used  in  commercial  establishments  for 
distributing  expense  are  not  fair  to  all  concerned. 

Thus  heat,  light,  power,  elevator  service,  insurance, 
rent,  taxes,  should  be  divided  among  the  departments 
in  proportion  to  the  services  rendered,  and  all  general 
expense  chargeable  to  the  commercial  department 
should  be  allocated  as  fairly  as  possible.  Only  by  so 
doing  is  it  possible  to  hold  each  department  head  re- 
sponsible for  results  and  to  check  up  his  results  against 
the  facilities  that  he  has  had  at  his  disposal. 

15.  Departmental  costs. — When  a  commercial  es- 
tablishment grows  to  large  proportions  the  cost  ac- 
counting of  some  of  the  departments  themselves  may 
be  interesting  and  important.  Thus  the  delivery  de- 
partment of  a  large  store  operating  a  large  number  of 
motor  trucks  offers  a  good  field  for  good  cost  investi- 
gation and  control.  A  careful  record  should  be  kept» 
in  some  detail,  of  the  operating  expenses  of  each  truck 
and  also  of  the  service  rendered.  This  provides  a 
check  not  only  upon  the  efficiency  of  the  truck,  but 
upon  the  efficiency  of  the  driver.  Progressive  mer- 
chants who  operate  such  large  delivery  departments 
require  a  daily  report  on  each  truck  and  a  summarized 
monthly  report  as  well.  This  procedure,  it  will  be 
noted,  is  simply  applying  the  principles  of  cost  analy- 
sis that  hare  been  discussed  in  Chapter  XVI. 


806  '    COST  FINDING 

REVIEW  ' 

Why  should  every  business  enterprise  have  an  up-to-date  cost- 
finding  system? 

What  cost-finding  system  would  j^ou  devise  for  use  in  a 
foundry  ? 

Show  how  cost-finding  methods  may  be  applied  to  intermittent 
industries  and  even  to  retail  establishments. 

What  general  conclusions  are  the  result  of  your  study  of  this 
volume?     Why  do  many  cost  systems  fail? 

What  difficulties  are  usually  experienced  in  introducing  a  cost 
system:'.    How  would  you  plan  to  overcome  them? 

Note:  Numerous  questions  of  business  practice  and  procedure  are 
discussed  in  detail  in  the  Modern  Business  Reports.  The  current  list 
will  show  those  which  are  especially  related  to  this  volume.  Among  them 
may  be  mentioned 

45.  Cost  Accounting  for  a  Bank. 

95.  Construction  Accounts. 


INDEX 


Acconntlnjj,     Bookkeeping     and     Cost       Clerical  Expenses,  99 


Findiug,  (Ji»iiiig\ii»ii('(l,   10 

Accounting,    General,    relation   to   cost 
findiug,   12.   24 

Accounts, 

Classification     of.     37;      Controlling, 

185;  General  and  cost,  246 
See  Costs.  Identification  of 

Administrative  Expense,  Distribution 
of, 
Distribution  of  administrative  ex- 
pense. 217;  Selling  expense.  218— 
10;  Dcpartnientization,  219;  De- 
partnienlization  ncrording  to  fin- 
islifd  products,  2'21 :  Department- 
ization  according  to  processes,  222; 
Rcsiiin<5  of  methods  of  distributing 
expense,  224 

Analysis  and  Reduction  of  Costs,  Se» 
Costs.  Anal.vsis  ami  Reduction  of 

Assembling  and  Recording  Costs,  Set 
Costs,  Assembling  and  Recording 


Bookkeeping,     Accounting     and    Cost 

Finding.  diiJinguished,  10 
Bonus,  See  Wage!  Systems 
Br9ncbes,  Essential,  of  industry,  17 
Bunnell.    Sterling,    Distribution   Table, 

187-92 
Business,  Exi>onse  fluctuation  with  vol- 
ume of.  95 
Burden,  See  Ex]>cnse  or  Burden 
Burden  Distribution  Table,  189 


Capital, 

Interest  on  owned  capital.  197;  Rela- 
tion betwcf-u  depreciation  and,  133 

Capital  Account  and  Revenue  Account, 
128 

Ckeckboard  Method  of  Time  Becordlng, 

Church,  A.  Hamilton, 

Warhinp  rates.  170;  Production  cen- 
ters, 17.3 

Classification  of  Accounts,  For  identi- 
fying costs,  87-40 


307 


Commercial  Costs,  a02 

Continuous-Process  Costs,  ?11 

Continuous-Process  ludustneb,  42 

Controlling  Accounts,  185 

Cost  rinding. 

Functions  of,  28;  Blanks  and  forma 
for.  46 

Cost  Finding,  Importance  of. 

Few  men  understand,  1;  Purpose  of 
cost  records,  2;  Trained  men  re- 
quired, 3-5;  Each  business  re- 
quires individual  study,  5;  Import- 
ance to  whole  industries,  6 ;  In- 
adequacy of  crude  methods.  7 

Cost-Finding  Methods,  Application  of, 
Priucijiles  of  cost  finding  universally 
applicable,  292 ;  Foundry  c-osts, 
294;  Foundry  stores  system,  294; 
Elements  of  foundry  cost.  296; 
Cost  of  metal,  295;  Distribution  of 
departmental  expense.  296 ;  Gen- 
eral foundry  expense,  297;  Inter- 
mittent-process industries,  298; 
Cost  of  candy  manufacture,  299; 
Fluctuution  in  base  prices,  801; 
Other  industries,  301 ;  Commercial 
costs,  302;  Departmentization  of 
retail  stores,  303 ;  Departmental 
costs.  305 

Cost  Finding,  Problems  of, 

Bookkeeping,  accounting  and  cost 
linding.  10;  Cost  accounts  a 
branch  of  general  accounts.  11; 
Divisions  of  i>roduclive  industry, 
12;  When  cost  records  become  nec- 
essary, 14;  Application  to  manu- 
facturing plants,  16;  Department- 
ization. 20-23  ;  Basic  cost  problem, 
similar  in  all  industries,  24;  Rela- 
tions to  general  accounting.  24; 
.Functions  of  cost  finding.  28;  Com- 
plexity of  costs,  28;  Direct  and  in- 
direct material,  29;  Direct  end  in- 
direct labor,  30;  Burden  or  ex- 
pense. 30:  General  classification  of 
ex)>ense.  31  ;  Elements  of  total  .-ost* 
82;  Methods  of  adding  profit,  34; 


ms 


INDEX 


Application    of    eost-finding    prin- 
ciples, 35 
"Cost  Keeping,"  by  Sterling  Bunnell, 

187 
Cost  Ledgers,  233 

Cost  of  Labor,   \Vac;es,  and  systems  of 
payment,   78-92, 

See  Wage  Systems 
Cost  Becords, 

Purpose    of,    2;    Necessity    for,    14; 
Separate,  41 
Costs, 

Elements  of  total  costs,  32 ;  elements 
of  manufacturing,  33 ;  Errors  in, 
under  supplementary  rate,  199 ; 
Resjionsibility  for,  200;  Continu- 
ous-process, 211;  Detail  process, 
212;  More  refined  process,  213; 
Uses  of,  229;  Classes  of,  243; 
Estimating  costs  of  production.  269 

See  Costs,  Assembling  and  Recording 
Costs,  Analysis  and  Reduction  of, 

Use  of  cost  data,  252 ;  Organizing 
for  cost  reduction,  253  ;  Relation  to 
new  ideas  of  cost  control,  253 ; 
Cost  analysis.  254 ;  Special  cost  re- 
ports, 255;  Reduction  of  material 
cost,  257;  Reduction  of  labor  costs, 
258 ;  Relation  between  quantity 
and  equipment.  259 ;  Current  ideas 
of  expense,  260;  True  nature  of 
expense,  261 ;  Analysis  of  sources 
of  expense,  262;  Usefulness  of  ex- 
pense, 264;  Limiting  expense,  265 
Costs,  Assembling  and  Recording, 

Uses  of  costs,  229;  Cost  data  for  pre- 
dicting performance,  230 ;  Value 
of  expenditure  reports,  231; 
Sources  of  cost  data,  232 ;  Cost 
ledgers,  233 ;  Labor  and  material 
cards,  236;  Labor  cost  sheet,  237; 
Material  cost  sheet,  239;  Cost  sum- 
mary sheet,  240;  Grand  cost  sum- 
mary, 240;  Comparative  records, 
242;  Costs  by  classes,  243;  Detail 
of  costs,  243;  General  accounts  and 
cost  accounts.  246;  Cost  accounts 
should  agree  with  general  accounts, 
248 
Costs,  Identification  of, 

Classification  of  accounts,  37;  Forma- 
tion of  subsidiary  ledgers,  40; 
Separate  cost  records,  41 ;  Continu- 
ous-process industries,  42 ;  Inter- 
mittent process  industries,  44 ; 
Combined  intermittent  and  con- 
tinuous factories,  44;  Blanks  and 
forms  for,  46;  Two  classes  of 
blank    forms,     48;     Necessity    of 


identification,  49;  Mnemonic  sym- 
bols, 51;  Drawing  numbers,  52; 
Drawing  lists,  54;  Mnemonic  and 
number  systems  compared,  56 

Costs,  Labor,  Evaluation  of,  See  Evalu- 
ation of  Labor  Costs 

Costs,  Predetermination  of — Expense, 
Preparation    costs,    283;    Application 
to    special    tools,    285;    Predicting 
expense,  287;   Conclusions,  289 

Costs,  Predetermination  of — Materials 
and  Labor, 
General,  267;  Difficulties  in  pre- 
dicting performance,  268;  Estimat- 
ing costs  of  production,  269;  Dis- 
tinction between  actual  costs  and 
estimated  costs.  270;  Predetermina- 
tion of  material  costs,  272 ;  Control 
of  labor  costs,  day  rate,  272;  Con- 
trol of  labor  costs,  piece  rate,  273; 
Control  of  labor  cost  under  ad- 
vanced wage  systems,  274:  Time- 
study,  275  ;  F.  W.  Taylor  and  time- 
study,  276;  Motion  study,  277; 
Prank  Gilbreth,  277;  Industrial 
data,  278 ;  Standard  performance, 
279;  Limitations  and  difficulties, 
279;  Connection  with  advanced 
wage  systems,  281 


Day  Rate,  272 

Decay,  and  Depreciation,  130 

Departmentization, 

Advantages  of,  20-24;  Administra- 
tive divisions  of  industry,  20 ; 
Functions  of  employes,  21,  219; 
According  to  finished  products, 
221;  According  to  processes,  222; 
Der)artmentization  of  retail  stores, 
303 

Departments, 

Of  an  industry,  16;  Not  fully  de- 
veloped, 19 ;  Departmentization, 
20-23;  Planning,  61;  Distribution 
of  expense,  295 

Depreciation, 

General  theory  of,  127;  Cai)ital  ac- 
count and  revenue  account,  128; 
Forms  of.  129;  Wear  and  tear, 
129;  Physical  decay,  neglect,  130; 
Inadequacy  and  obsolescence.  131; 
Relation  between  depreciation  and 
repairs,  132;  Relation  between  de- 
preciation and  capital,  133;  Orig- 
inal, jiresent  and  scraj)  values,  135; 
Determination  of,  137;  General 
method  of,  138;  Percentage  on 
original  cost,   140;   Percentage  oo 


INDEX 


309 


diminishing  value,  141 ;  Sinking 
fund,  141;  Typical  rates  of,  144; 
Depreciation,  a  manufacturing  ex- 
pense,  146 

Detail-Process  Costs,  212 

Dewey  System,  53 

Distribution,  Expense, 

Purposes  of,  101 ;  Resum4  of  methods 

of,  224 
See  Factory  Expense.  Distribution  of; 
Expense    Distribution,     Volume    of 
Work   and;    Expense   Distribution, 
Other  Features  of 

Division  of  Labor,  16 

Drawing  Lists,  54;  And  Dewey  decimal 
system,   54 

Drawing  Numbers,  52 

Drawings,  Use  of,  116 


Engineering  Development  Costs,  116 

Estimating  Cost,  269 

Evaluation  of  Labor  Costs,  78 ; 

Recording  time  by  cbeckboard,  78; 
Traveling  timekeeper,  81 ;  Job 
tickets,  82 ;  Other  time-recording 
devices,  87 ;  Summarizing  time  and 
labor  returns,  88;  Other  items  of 
labor  costs,  90 ;  Reduction  of  labor 
costs.  259 

Expenditure  Reports,  Value  of,  231 

Expense, 

Classification  of,  31;  Fixed  and  vari- 
able, 202;  True  nature  of,  261; 
Analysis  and  sources  of,  262 ;  Use- 
fulness of,  263;  Limiting,  265; 
Predicting,  287 

Expense  Accounts,  exami>le  of,  40 

Expense,  Administrative,  See  Adminis- 
trative  £xi)ense,    Distribution  of 

Expense  Distribution, 
Puri)oses   of,    101 

See  Factory  Exjiense,  Distribution  of; 
Expense  Distribution,  Volume  of 
Work  and;  Expense  Distribution, 
Other  Features  of;  Administrative 
Exjwnse.  Distribution  of 

Expense  Distribution,  Other  Features 
of. 
Basis  of  expense  distribution,  208 ; ' 
Application  to  averaging  methods, 
209;  Ap])lication  and  Umitation, 
210;  Verification  of  expense  distri- 
bution, 210;  Continuous  process 
costs,  211;  Detail' process  costs, 
212 ;  More  refined  process  costs. 
213;  Difficulties  of  process  account- 
ing, 215 ;  R€sum6  of  methods,  224- 
28 


Expense  Distribution,  Volume  of  Work 
and. 

Variation  of  expense  with  volume  of 
work,  196;  Illogical  increase  in  ex- 
pense, 197;  Errors  in  costs  undef 
averaging  methods,  198 ;  Errors  in 
costs  under  the  supplementary  rate, 
199;  Responsibility  for  costs,  200; 
H  L.  Gnntt's  solution,  200;  Fixed 
and  variable  expense,  202 ;  N.  T. 
Ficker,  202 ;  Disposition  of  undis- 
tributed fixed  expense,  204;  Prob- 
lem of  the  manager.  206 ;  Dis*-iba- 
tion  of,  219-24;  R68um§  of,  224- 
28 
Expense  or  Burden, 

Allocating.  30;  General  classification 
of  expense,  31;  Character  of,  93- 
93 ;  Expense  fluctuation  with  vol- 
ume of  business,  95 ;  Variation-  of, 
due  to  time,  96;  Expense  variation 
with  character  and  size  of  work, 
98;  Clerical  and  selling  expense, 
99 ;  Two  purijoses  of  expense  dis- 
tribution, 101;  Classifying  expense 
factors,  101;  Theoretical  considera- 
tion of  interest  and  rent.  104; 
Practical  consideration  of  interest 
and  rent.  106;  Interest  on  owned 
capital,  107;  Taxes  and  insurance, 
110 ;  Defective  material  and  spoiled 
work,  110;  Lost  time,  112;  En- 
gineering and  development,  113; 
Patterns,  drawings,  and  small 
tools,  116;  Special  apparatus,  117; 
Improvements  and  repairs,  118; 
Inclusion  of  burden  in  cost  of  re- 
pairs. 120;  Plant  ledger,  121;  Sun- 
dry expenses,  123 ;  Character  of 
general  expense,  124;  Cost  of  wel- 
fare work,  124;  N.  T.  Ficker,  202; 
Current  ideas  of  expense,  260; 
True  nature  of  expense,  261; 
Analysis  of  sources  of  expense, 
262;  Usefulness  of  expense,  264; 
Limiting  ex]>en8e,  265 

See  Factory  Expense,  Distribution  of; 
Costs.  Predetermination  of — Ex- 
pense 


Factory  Costs,  Elements  of.  32 
Factory  Expense,  Distribution  of. 

In  general,  148;  Distribution  by  per- 
centage on  material  cost,  150;  Ad- 
vantages and  defects,  151;  Distri- 
bution by  percentage  on  labor  cost, 
153 ;  Advantages  and  defects  of, 
153  ;  Distribution  by  percentage  OB 


510 


INDEX 


prime  cost,  156-58;  Distribution 
by  percentage  on  man-hours.  158- 
60;  Inadequacy  of  methods  of, 
161;  Relation  between  machine 
proTPSses  and  expense,  163 ;  Old 
machine  rate,  165-70;  Alexander 
Hamilton  Church,  170,  173;  Sup- 
plementary rate,  170;  Fixed  and 
variable  exjiense,  202 
See  Production  Centers  and  Supple- 
mentary Rate;  Expense  Distribu- 
tion. Volume  of  Work  and 

FIcker,  N.  T.,  Expense,  202 

Foundry, 

Costs  of,  294;  Stores  system  of.  294; 
r:it>racnls  of  costs,  295;  General 
expense,  297 


Issuing  and  Evaluating  Material, 

In  general.  59;  Requisitions  by 
foreman,  60 ;  Planning  production 
in  advance,  61 ;  Specifying  the  ma- 
terials, 62  ;  Production  orders,  64 ; 
Instructions  to  storekeeper,  66; 
Emergency  requisitions,  67;  Requi- 
sitioning indirect  material,  68; 
Valuation  of  issued  material,  69 ; 
Value  of  materials  in  process,  71 ; 
Value  of  finished  parts,  72 ;  Value 
of  finished  stock  and  product,  73 ; 
Material  wastes,  74 


Job  Tickets,  82 


Gantt,  H,  li.,  Expense  Distribution,  86, 

200 
General  Accounts  and  Cost  Accounts, 

11,  2-16-50 
General  Expenses,  124 
GUbreth,  Frank,  277 


Heating  Factor  in  Expense,  181 


Identification     of     Costs,     See     Costs, 

Identification  of 
Improvements  and  Repairs,  118 
Inadequacy,  in  Cost  of  Production,  131 
Indexing  Cost  Summaries,  245 
Industrial  Data,  Value  of.  278 
Industry, 

Importance    of    cost    finding    to,    5; 
Fundamental  branches  of,  18;  De- 
partments not  fully  developed,  19; 
Departmentization  of,  20 
Industry,  Division  of, 

Continuous  |)"rocess      industries,      42; 
Intermittent  process  industries,  44; 
Coml)ined  intermittent  and  continu- 
ous factories,  44 
Industry,    Four    essential   branches   of, 

17 
Insurance  and  Taxes,  110 
Instructions  to  Storekeeper,  66 
Interest  and  Bent, 

Theoretical     consideration     of,     104; 
Practical    consideration     of,     106; 
Interest  on  owned  capital,   107 
Intermittent- Fxocess     Industries,     44, 
298 


Labor  and  Material  Cards,  236 

Labor  Costs,  Evaluation  of, 

Distribution  of  exjiense  by  percentage 
on,  153;  Reduction  of,  258;  Con- 
trol of,  day  rate,  272;  Control  of, 
piece  rate,  273 ;  Control  under  ad- 
vanced wage  systems,  274 
See  Evaluation  of  Labor  Costs 

Labor,  Direct  and  indirect,  30 

Labor,  Division  of,  16 

Land-Building  Factor,  in  Expense,  178 

Ledger, 

General,   39;    Subsidiary,   40;    Plant, 
121;    Cost,   233 

Ligbting  Factor  in  Expense,  180 

Lost  Time,  112 


Machine  Bate,  of  Expense, 

Old,  164,  Modern,  165-72;  Diffi- 
culties and  errors  in  ai>i)lying,  192 

Management  and  Supervision  Factor  in 
Expense,   182 

Man-Hours    Expense,    Distribution    of, 
158 

Manufacturing  Costs,  Elements  of,  32 

Material, 

Direct  and  indirect,  29;  Issuing  and 
evaluating,  59—77;  Specifying,  62; 
Requisitioning  indirect,  68;  Valua- 
tion of  issued  material,  69;  Value 
in  proce.ss  of  fabrication,  71 ; 
Wastes,  74 ;  Defective  material  and 
spoiled  work,  110;  Distribution  of 
ex))ense  by  percentage  on  material 
costs,  150;  Labor  and  material 
costs,  236;  Material  cost  sheet, 
239;  Reduction  of  cost,  257;  Pre- 
determination ef  material  costs, 
272 


INDEX 


Sll 


Material.  Tssnln?  and  Evalnatisg.  See 
Issuing  anil  Kvuluating  Material 

Mnemonic  Symbols, 

Use  of.  51 ;  Comparison  with  number 
systems.  56 

Monthly  Statement,  Example  of.  26 

Motion- Study.  277 


Obsolescence,  In  expense,  131 
Orders,  Production,   64 
Organization  Factor  in  Expense,  181 


Patterns,  Use  of,  116 

Piece  Rate,  273 

Planning.   Production,  in  advance,  61 

Plant  Ledger,  IJl 

Power  Factor  in  Expense,  179 

Predetermination  of  Costs,  See  Costs, 
I'ri'dt  termination    of 

Predicting  Performance,  230;  See 
Costs,  Pri-dctormiDation  of  Ma- 
terials and  Labor 

Process  Costs,  211 

Continuous  process,  211;  Detail  proc- 
ess, 212;  More  refined,  213;  Diffi- 
culties of  jirocess  accounting,  215; 
De])artmeDtization  according  to 
processes,  222 

Frodnction, 

Four  divisions  of,  12 ;  Planning  in 
advance,   61 

Production  Centers  and  Supplemen- 
tary Bate, 
General  jirinciples  of,  173;  A.  Hamil- 
ton Churcli.  173;  Application  to 
actual  conditions,  175;  Production 
factors.  176;  Arrangement  of  pro- 
duction centers,  177;  Land  build- 
ing factor,  178;  Power  factor, 
179;  Lighting  factor.  180;  Heat- 
ing factor.  181 ;  Organization 
factor.  181;  Management  and 
supervision  factor,  182;  Stores  and 
transiKirtation  factor,  183;  Indi- 
vidual factors,  184;  Controlling 
accounts,  Itsa ;  Assembling  of  pro- 
duction factors,  185;  Sterling 
Bunnell,  187;  Difficulties  and  er- 
rors in  applying  machine  rates, 
192 

Frodnction  Factors,  176-84;  Assem- 
bling of,  186 

Production  Orders,  64 

Productive  Industry,  Divisions  of,  12 

Bates, 

Qf  depreciation,   144;  Old  machine, 


164;  Modern  machine,  165;  Difll- 
culties  and  errors  in  applying 
modern  machine  rates,  192 

Bent  and  Interest, 

Theoretical  consideration  of,  104; 
Practical  consideration  of,  106 

Bepairs, 

Imi)rovement8  and.  118;  Inclusion 
6f  burden  in  cost  of,  120 ;  Relation 
between  depreciation  and,  132 

Beqnisitlons, 

Issuing  and  evaluating  material,  59— 
77;  By  foremen,  60;  Indirect  ma- 
terial.  68 

Besldual  or  Scrap  Value,  136 

Bevenue  Account  and  Capital  Account) 
Losses  on,  128 


Scrap  Value, 

Residual  value.  136.  137;  Fixing  th« 

rate  of  depreciation,  138—45 
Selling  Expenses,  99,  218 
Sinking  Fund,  141 
SpoUed  Work,  110 
Standard  Performances,  279 
Storekeeper,  Instructions  to,  66 
Stores   and   Transportation  Factor  in 

Expense,  I8;i 
Subsidiary  Ledgers,   Formation  of,  40 
Sundry  Expenses,  123 
Supplementary  Bate,  170, 

A.   Hamilton   Church   on,   170;   Gen- 

eral    principles,     173;     Errors    in 

costs  under  the  supplementary  rate, 

199 
See  Production   Centers  and  Sapple- 

mentary   Rate 
Symbols,  Mnemonic,  51 


Taxes  and  Insurance,  110 
Taylor,  F.  W.,  Time  study,  278 
Time,  Recording, 

In   labor  costs,   78 

See  Evaluation  of  Labor  Costs 
Time-study,  275 
Tools, 

Use   of,    116;    Special,    117;    Special 
toots  in  determination  of  costs.  286 
Total  Costs, 

Elements  of,  32 ;  Adding  profit  to,  34 
Traveling  Timekeeper,  81 


Valuation,  of  Material,  See  Issuing  and 

Evaluating  Material 
Values,  Original,  present  and  scrap,  188 


312 


INDEX 


Wage  Systems, 

Labor  costs,  78-92;  Recording  time 
by  checkboard,  78;  Time  record- 
ers, 79;  Traveling  timekeeper,  81; 
Job  tickets,  82;  H.  L.  Gantt,  86; 
Summarizing  time  and  labor  re- 
turns, 88;  Control  of  labor  costs, 
day  rate,  272;  Labor  cost  control 
mnder  advanced  wage  systems, 
274;  Time  study,  275;  F.  W.  Tay- 
lor plan,  276;  Motion  study,  277; 


Frank    Gilbreth,    277;    Industrial 

data,  278;    Standard  performance, 

279;  Advanced  v/age  systems,  28X 

See  Factory  Expense,   Distribution  of 

Wear  and  Tear,  Rate  of  depreciation, 
129 

Welfare  Work,  Cost  of,  124 

Work,  Effect  of  volume  on  expense  dis- 
tribution 
vSee  Expense  Distribution,  Volume  of 
Work  and 


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